Consider the following details of the income statement of the Manteray Pen Company (MPC) for the year ended 31 December 20X0:

MPC’s fixed manufacturing costs were €3.0 million, and its fixed selling and administrative costs were €2.2 million. Sales commissions of 3 per cent of sales are included in selling and administrative expenses.

The division had produced and sold 2 million pens. Near the end of the year, Pizza Hut offered to buy 150,000 pens on a special order. To fill the order, a special Pizza Hut logo would have to be added to each pen. Pizza Hut intended to use the pens for special promotions in an eastern city during early 20X1.

Even though MPC had some idle plant capacity, the president rejected the Pizza Hut offer of €660,000 for the 150,000 pens. He said, The Pizza Hut offer is too low. We’d avoid paying sales commissions, but we’d have to incur an extra cost of €.40 per pen to add the logo. If MPC sells below its regular selling prices, it will begin a chain reaction of competitors’ price cutting and of customers wanting special deals. I believe in pricing at no lower than 8% above our full costs of €9,500,000 , 2,000,000 units = €4.75 per unit plus the extra €.40 per pen less the savings in commissions.

1. Using the contribution-margin technique, prepare an analysis similar to that in Exhibit 5.6 on p. 184. Use four columns: without the special order, the effect of the special order (one column total and one column per unit) and totals with the special order.

2. By what percentage would operating income increase or decrease if the order had been accepted? Do you agree with the president’s decision? Why?

Exhibit 5.6:

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Sales Less cost of goods sold Gross margin or gross profit Less selling and administrative expenses Operating income € 11,000,000 6,500,000 € 4,500,000 3,000,000 € 1,500,000