Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs.

For the first 6 months of 2013, the company reported the following operating results while operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold $4,200,000

Gross profit $2,800,000

Operating expenses $2,000,000

Net income $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.

Required:

(a) Prepare an incremental analysis for the special order.

(b) Should Gregg company accept the special order? Justify your answer.

Question

Martin Baker

Business

17 August, 20:28

Gregg Company supplies schools with floor mattresses to use in physical education classes. Gregg has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs.

For the first 6 months of 2013, the company reported the following operating results while operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold $4,200,000

Gross profit $2,800,000

Operating expenses $2,000,000

Net income $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.

Required:

(a) Prepare an incremental analysis for the special order.

(b) Should Gregg company accept the special order? Justify your answer.

+5

Answers (1)

Know the Answer?

Stephen Richmond · Answer 1

(a) Prepare an incremental analysis for the special order.

Sales (600 mats * $45 each) $ 27,000

Cost of Goods Sold (600 mats * $31.50) ($ 18,900)

Gross Profit $ 8,100

Operating Costs (600 mats * $14.00) ($ 8,400)

Shipping Costs ($1,200)

Net Income ($1,500)

(b) Should Gregg company accept the special order?

No

Because the Order presents a financial disadvantage of $1,500.

Explanation:

Hint: Consider only the Incremental Costs and Revenues that relate to the 600 mat production

Cost of Goods Sold

Variable Cost per mat = ($4,200,000 * 75%) / 100,000

= ($ 3,150,000) / 100,000

= $31.50

Operating Costs

Variable Cost per mat = ($2,000,000 * 70%) / 100,000

= $14.00