Moonbeam Company manufactures toasters. For the first 8 months of 2020, the company reported the following operating results while operating at 75% of plant capacity: Sales (350,000 units) $4,375,000
Cost of goods sold 2,600,000
Gross profit 1,775,000
Operating expenses 840,000
Net income $ 935,000
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 80% variable and 20% fixed. In September, Moonbeam receives a special order for 15,000 toasters at $7.60 each from Luna Company. Acceptance of the order would result in an additional $3,000 of shipping costs but no increase in fixed costs.
Instructions
a. Prepare an incremental analysis for the special order.
b. Should Moonbeam accept the special order?

Moonbeam Company

a) Incremental Analysis for the Special Order:

Sales (15,000)       at $7.60    $114,000

Variable cost of sales 5.20       78,000

Variable overhead      1.92        28,800

Total variable costs              ($106,800)

Contribution                              $7,200

b) Moonbeam should accept the special order.  It makes a contribution of $7,200 to the defraying of the fixed costs.

Explanation:

a) Data and Calculations:

operating results while operating at 75% of plant capacity:

                                             Total        Unit

Sales (350,000 units)        $4,375,000   $12.50

Cost of goods sold             2,600,000

Variable (70%) $1,820,000                          5.20

Fixed (30%)          780,000

Gross profit                          1,775,000

Operating expenses             840,000

Variable (80%)  $672,000                          1.92

Fixed (20%)         168,000

Net income                        $ 935,000

Incremental Analysis for the Special Order:

Sales (15,000)       at $7.60    $114,000

Variable cost of sales 5.20       78,000

Variable overhead      1.92        28,800

Total variable costs              ($106,800)

Contribution                              $7,200

b) Incremental analysis concentrates on the variable elements of costs.  The method disregards all fixed costs as they are regarded as sunk or past costs, and therefore, irrelevant to the decision at hand.

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