Question
Aqua Fun Income Statement For the Month Ended October 31, 2024 Sales in Units 30,000 Net Sales Revenue $600,000 Variable Costs: Manufacturing 150,000 Selling and
Aqua Fun | |
Income Statement | |
For the Month Ended October 31, 2024 | |
Sales in Units | 30,000 |
Net Sales Revenue | $600,000 |
Variable Costs: |
|
Manufacturing | 150,000 |
Selling and Administrative | 103,000 |
Total Variable Costs | 253,000 |
Contribution Margin | 347,000 |
Fixed Costs: |
|
Manufacturing | 127,000 |
Selling and Administrative | 86,000 |
Total Fixed Costs | 213,000 |
Operating Income | $134,000 |
suppose Overtown wishes to buy 4,200 vests fromAqua Fun. Aqua Fun will not incur any variable selling and administrative expenses on the special order. The Aqua Fun
plant has enough unused capacity to manufacture the additional vests. Overtown has offered $12 per vest, which is below the normal sales price of $20.
Requirement 1. Identify each cost in the income statement as either relevant or irrelevant to Aqua Fun's decision.
Variable Manufacturing Costs
irrelevant
relevant
Variable Selling and Administrative Costs
irrelevant
relevant
Fixed Manufacturing Costs
irrelevant
relevant
Fixed Selling and Administrative Costs
irrelevant
relevant
Requirement 2. Prepare a differential analysis to determine whether Aqua Fun
should accept this special sales order. (Enter decreases to revenue or increases to costs with a parentheses or minus sign.)
|
|
| |
|
|
| |
|
| in operating income |
|
Decision:
Accept the special order
Do not accept the special order
Requirement 3. Identify long-term factors
Aqua Fun
should consider in deciding whether to accept the special sales order.
In addition to determining the special order's effect on operating profits,
Aqua Fun's
managers also should consider the following:
A.Will
Aqua Fun's
other customers find out about the lower sale price
Aqua Fun
accepted from
Overtown?
If so, will these other customers demand lower sale prices?
B.
Will the special order customer come back again and again, asking for the same reduced price?
C.How will
Aqua Fun's
competitors react? Will they retaliate by cutting their prices and starting a price war?
D.
All of the above
E.
None of the above
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