Question

MZE Manufacturing Company has a normal plant capacity of 37,500 units per month. Because of an extra large quantity of inventory on hand, it expects to produce only 30,000 units in May. Monthly fixed costs and expenses are $112,500 ($3 per unit at normal plant capacity) and variable costs and expenses are $8.25 per unit. The present selling price is $13.50 per unit. The company has an opportunity to sell 7,500 additional units at $9.90 per unit to an exporter who plans to market the product under its own brand name in a foreign market. The additional business is therefore not expected to affect the regular selling price or quantity of sales of MZE Manufacturing Company.

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Prepare a differential analysis report, dated April 21 of the current year, on the proposal to sell at the special price.

Answer 1

Answer:

If the special is accepted the net income will increase by $12,375

Explanation:

The relevant cost for decision to accept the special order are

I. the incremental contribution from of producing 7,500 units

2. Any incremental other cost associated with the special order

Note that whether or not the special order is accepted the monthly fixed cost of  $112,500 would still  be incurred either way. Therefore, it is irrelevant for this decision

Contribution per unit =Selling price - Variable cost  = $9.90-8.25

Incremental contribution  from the special order

= $(9.90 - 8.25) × 7,500                                            $12,375

Incremental fixed cost                                                       0

Increase in net income                                               12,375

If the special is accepted the net income will increase by $12,375