FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Concept explainers

Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost st…
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs r…
Question

How would I present an analysis supporting a decision to accept or reject the special order? Assuming Ralstons regular sales are not affected by this order. 

Business Decision Case The following total cost data are for Ralston Manufacturing Company, which has a normal capacity per period of 400,000 units of product that sell for $18 each. For the foreseeable future, regular sales volume should continue at normal capacity of production.
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Transcribed Image Text:Business Decision Case The following total cost data are for Ralston Manufacturing Company, which has a normal capacity per period of 400,000 units of product that sell for $18 each. For the foreseeable future, regular sales volume should continue at normal capacity of production.
© Cambridge Business Publishers Chapter 6 Cost-Volume-Profit Relationships 265 Direct materials. . $1,720,000 1,120,000 560,000 880,000 720,000 200,000 Direct labor... Variable overhead Fixed overhead (Note 1). Selling expense (Note 2) Administrative expense (fixed) $5,200,000 Notes: 1. Beyond normal capacity, fixed overhead cost increases $30,000 for each 20,000 units or fraction thereof until a maximum capacity of 640,000 units is reached. 2. Selling expenses are a 10% sales commission. Ralston pays only one-half of the regular sales commission rates on any sale of 20,000 or more units. Ralston's sales manager has received a special order for 48,000 units from a large discount chain at a special price of $16 each, F.O.B. factory. The controller's office has furnished the following additional cost data related to the special order: 1. Changes in the product's construction will reduce direct materials $1.80 per unit. 2. Special processing will add 25% to the per-unit direct labor costs. 3. Variable overhead will continue at the same proportion of direct labor costs. 4. Other costs should not be affected. Required Present an analysis supporting a decision to accept or reject the special order. Assume Ralston's regular sales are not affected by this special order. a. 11
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Transcribed Image Text:© Cambridge Business Publishers Chapter 6 Cost-Volume-Profit Relationships 265 Direct materials. . $1,720,000 1,120,000 560,000 880,000 720,000 200,000 Direct labor... Variable overhead Fixed overhead (Note 1). Selling expense (Note 2) Administrative expense (fixed) $5,200,000 Notes: 1. Beyond normal capacity, fixed overhead cost increases $30,000 for each 20,000 units or fraction thereof until a maximum capacity of 640,000 units is reached. 2. Selling expenses are a 10% sales commission. Ralston pays only one-half of the regular sales commission rates on any sale of 20,000 or more units. Ralston's sales manager has received a special order for 48,000 units from a large discount chain at a special price of $16 each, F.O.B. factory. The controller's office has furnished the following additional cost data related to the special order: 1. Changes in the product's construction will reduce direct materials $1.80 per unit. 2. Special processing will add 25% to the per-unit direct labor costs. 3. Variable overhead will continue at the same proportion of direct labor costs. 4. Other costs should not be affected. Required Present an analysis supporting a decision to accept or reject the special order. Assume Ralston's regular sales are not affected by this special order. a. 11
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