Moonbeam Company manufactures toasters. For the first 8-months of 2017, 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 21,600 toasters at $8.12 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,100 of shipping costs but no increase in fixed costs.

Required:
a. Prepare an incremental analysis for the special order.
b. Should Moonbeam accept the special order? Why or why not?

b. Moonbeam should accept the special order. It has the required capacity to deliver the additional toasters. It will generate an incremental income of $18,500, which is better than nothing.

Explanation:

a) Data and Calculations:

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

Operating capacity = 75%

Current sales = 350,000

Plant capacity = 466,667 units (350,000/75%)

Total Per Unit

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

Variable cost of goods sold = 1,820,000 ($2,600,000 * 70%)

Variable operating expense = 672,000 ($840,000 * 80%)

Total variable costs = $2,492,000 $7.12

Net income = $1,883,000

Special Order:

Incremental Sales revenue

Units of toasters (21,600 at $8.12) $175,392

Variable costs (21,600 * $7.12) 153,792

Shipping costs 3,100

Total incremental costs $156,892

Incremental net income $18,500