5-1 Special Order Consider the following details of the income statement of the Forman Company (FC) for the year ended December 31, 20X1: Sales Less cost of goods sold Gross margin or gross profit Less selling and administrative expenses Operating income $17,560,000 9.300,000 $ 8,260,000 4,800.000 $3,460,000 FC's fixed manufacturing costs were $3.9 million and its fixed selling and administrative costs were $3.5 million. Sales commissions of 3% of sales are included in selling and administrative expenses. The division had produced and sold 3.1 million pens. Near the end of the year, Four Pizza Brothers (FPB) offered to buy 148,000 pens on a special order. To fill the order, a special (FPB) logo would have to be added to each pen. (FPB) intended to use the pens for special promotions in an eastern city during early 20X2. Even though FC had some idle plant capacity, the president rejected the FPB offer of $705,000 for the 148,000 pens. He said, The FPB offer is too low. We'd avoid paying sales commissions, but 'd have to incur an extra cost of $.40 per pen to add the logo. If FC 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 10% above our full costs of $13,800,000/3,100,000 units = $4.45 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 page 187. 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? 5-2 Contribution and Absorption Income Statements The following information is taken from the records of the Zealand Manufacturing Company for the year ending December 31, 2012. There was no beginning or ending inventories. Sales Less: Variable expenses Manufacturing Selling and administrative Total variable expenses Contribution margin Less: Fixed expenses Manufacturing Selling and administrative Total fixed expenses Operating income CHAPTER 5 RELEVANT INFORMATION FOR DECISION MAKING WITH A FOCUS ON PRICING DECISIONS Exhibit 5-6 Cordell Company Without Special Order 1,000,000 Units $40,000,000 $24,000,000 2,200,000 $26,200,000 $13,800,000 $ 6,000,000 5,800,000 $11,800,000 $ 2,000,000 Effect of Special Order, 100,000 Units Total $2,600,000 $2,400,000 $2,400,000 $ 200,000 $ 200,000 Per Unit $26 $24 $24 $2 $2 With Special Order, 1,100,000 Units $42,600,000 $26,400,000 2,200,000 $28,600,000 $14,000,000 $ 6,000,000 5,800,000 $11,800,000 $ 2,200,000 187 Comparative Predicted Income Statements, Contribution-Margin Technique for Year Ended December 31, 20X1