Select Page

There are 3 problems this week. Click the tabs at the bottom of the spreadsheet to move to problems 2 and 3.
Special Order Decision
Lancaster Lighting Corp. produces a model of outdoor floodlight that normally sells for \$15 per light. Sales per year are 500,000 units, and the production line
is operating at 70% capacity. Lancaster has been presented with a special one-time export order for 40,000 lights at \$11 per light. The \$11 price is below
the current total cost of production. Listed below are the costs based on the production of 500,000 units. There would be no increase in fixed costs by accepting
this order, but there would be a one-time crating expense of \$5,000. The special order would have no effect on the existing business, because it is being exported to
a market that Lancaster does not normally serve. Prepare an incremental analysis and determine the effect of accepting the special order. Should Lancaster
accept this order?
Costs at 500,000 units of production:
Direct labor
Direct materials
Total manufacturing cost

ANALYSIS:
1. Calculate unit costs.
Direct labor
Direct materials
Total manufacturing cost
2. Calculate profit or loss on special order:
Revenue
Direct labor
Direct materials
Crating cost
Incremental costs
Increase in net income

per unit

Per Unit
11.00

440,000
5,000

3. Yes, Lancaster should accept this order, because net income will increase by \$45,000.

5,000
435,000

Sports Equipment Unlimited makes and sells soccer goals and has sales of 20,000 units per year. The plant is operating at full capacity.
A potential supplier has approached Sports Equipment Unlimited and offered to supply the soccer goals at a finished cost of \$31.50
per goal. If the company buys rather than manufactures, they will be able to eliminate 60% of fixed manufacturing costs by leasing
unused space. The current costs are as follows:
Per Unit
Direct labor
Direct materials
Total manufacturing cost
INSTRUCTIONS:
Prepare an incremental analysis for the decision to make or buy the soccer goals.
Show the cost of continuing to make and to buy the goals. Show the effect on net
Make
Direct labor
Direct materials
Purchase cost
Total manufacturing cost

630,000
630,000

Sports Unlimited should continue to manufacture the goals, even though the unit cost is higher than
the purchase price. This is true because there will be some remaining fixed costs even if they buy.
As we see, the net income will fall by \$21,000 if Lancaster buys the goals.

Change in
Net Income
(630,000)
(630,000)

Cash Budget
Below is summary monthly income statement data for Ace Manufacturing Company.

Sales revenue
Direct materials purchases
Direct labor

January
250,000
60,000
88,000
50,000
45,000

February
275,000
70,000
95,000
52,000
46,000

All sales are on account, and history has shown that 40% of sales are expected to be collected in the month of the sale, with 60% collected the following month.
Direct materials are paid 50% in the month of purchase and 50% the following month. All other expenses are paid as incurred. All costs shown are cash-based
costs (depreciation has already been eliminated).
Other data:
1. December sales were \$230,000.
2. Purchases of direct materials purchased in December were \$50,000.
3. The company has interest payments due of \$5,000 per month.
4. The cash balance on January 1 was \$15,000.
Instructions
A. Prepare schedules for expected collections from customers and expected payments for direct materials purchases.
B. Prepare a cash budget for January and February.
Cash collections:
Credit Sales

January

February

December
January
February

Cash disbursements for materials:
December
January
February

Purchases
50,000
60,000
70,000

January
25,000
30,000
55,000

Cash budget:
Beginning cash
Cash collections
Direct materials purchases
Direct labor