Determination of Relevant Costs The Frel Company makes a standard line of gauges. A large aircraft company has asked for competitive bids on an order of 10,000 special gauges for use in the manufacture of aircraft parts. Frel Company wants to know the minimum price to bid that will insure at least a $5,000 increase in net income.

The operating picture, as it will appear for the year if the extra order is not landed, is as follows:

FREL COMPANY Income Statement for the Year Ending December 31, 191 Sales (40,000 gauges) $600,000 Cost of sales:
Direct materials $100,000 Direct labor 200,000 Variable overhead (varies with direct-labor hours) 50,000 Fixed overhead 100,000 450,000 Gross margin $150,000 Selling and administrative expenses:
Variable (including shipping costs of 40¢ per unit) $ 30,000 Fixed 80,000 110,000 Net income $ 40,000 Assume that the cost behavior patterns will not be changed by the additional order, except as follows:

a. Shipping costs, which are ordinarily borne by the Frel Company, will be paid for and borne by the aircraft company.

b. Special setup costs and the cost of special tools (that will not be reusable) will total $5,000.

c. Direct-labor charges on these gauges will be 20 percent higher because of more time needed per unit.
Prepare a new income statement, assuming that the order is landed after the minimum price has been quoted. Set up your solution in the following manner:

COLUMN (A) (B) (C) OLD INCOME NEW INCOME STATEMENT CHANGE STATEMENT Sales Cost of sales:
Direct materials Direct labor (and so forth)
. Examine the format of your answer to requirement 1. How else could the information be presented? lop5