Bennigan Battery Company is considering accepting a special order for 20,000 batteries that it received from a
Question:
Bennigan Battery Company is considering accepting a special order for 20,000 batteries that it received from a discount retail store. The order specified a price of $4.50 per unit, which reflects a discount of $1.40 per unit relative to the company's regular price of $5.90 per unit. Bennigan's accounting department has prepared the following analysis to show the cost savings resulting from additional sales:
COST PER UNIT WITHOUT THE | COST PER UNIT WITH THE | ||||||
COSTS | ADDITIONAL SALES (100,000 UNITS) | ADDITIONAL SALES (120,000 UNITS) | |||||
Variable | $3.60 | $3.60 | |||||
Fixed | 0.90 | 0.75 |
No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduced from $4.50 to $4.35, Bennigan's president believes that a reduction in the price to $4.50 is justified for this order.
Part 1
Requirements
(a) | Should the order for the 20,000 units at a price of $4.50 be accepted? What will be the impact on Bennigan's operating income? |
(b) | Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest? |
(c) | What other considerations are important in this case? Why? |
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Part 1
Requirement a. Should the order for the 20,000 units at a price of $4.50 be accepted? What will be the impact on Bennigan's operating income?
Begin by determining the contribution margin per unit for this order. (Use parentheses or minus sign to show a negative contribution margin per unit.)
Less: | ||
Contribution margin per unit |
Part 2
Now determine the effect on Bennigan's operating income if it accepts this order.
First determine the formula then calculate the incremental profit or loss as a result of this order. (Complete all input cells. Enter a "0" for items with a zero balance. Use parentheses or minus sign to show a negative contribution margin or an incremental loss.)
- | = | Incremental profit (loss) | ||||
- | = |
Part 3
Should the order for the 20,000 units at a price of $4.50 be accepted?
Bennigan's .............................. accept the order for the 20,000 units at a price of $4.50 because it's operating income will ....................................... if it accepts this order.
Part 4
Requirement b. Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest? ........................... , the accounting department's analysis ............................ the best way to evaluate this decision. Average unit costs ........................ are the most accurate reflection of costs can be misleading.
Fixed costs ............................... relevant to this decision. The decision should be based on .................................... costs.
Part 5
Requirement c. What other considerations are important in this case? Why?
Other considerations: | Why: |
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young