Case 3 For the year ended December 31, 2005, the "ABC" Factory a manufacturer of men's shirts prepared the following income statement. Total L.E million Per Unit L.E Sales Revenue (1 million shirts) 10 10 Less Manufacturing cost of sales 6 6 Gross Profit 4 4 Less: Selling and Administrative expenses Net Income. 3 3 Net Income 1 1 The usual selling price was fixed at L.E 10 per unit. The salesmen's commissions are calculated on the basis of a fixed 5% of the usual per unit selling price. Other variable manufacturing and selling expenses vary directly with the quantity of units produced and sold, All production was sold during the year 2005. the "ABC" Factory's committed fixed manufacturing costs were L.E2 millions and its variable selling expenses were one million including salesmen's commissions and shipping expenses. Factory capacity utilization is at present 80%, and the factory does not keep any inventory. The board of the "ABC" Factory felt that some actions must be taken to improve profitability for the coming year 2006. the Chairman of the "ABC" Factory advocates the acceptance of a bulk order which have just been received from a mail order concern for the supply of 100000 shirts a reduced per unit selling price of L.E7, but if the order is accepted it will not affect the existing market for one million shirts at the usual per unit selling price of L.E10, also it will not required any additional variable selling expenses because the buyer would pay for the shipping expenses, and instead of the usual rate of the salesmen's commission a lump-sum sales commission of L.E40000 will be the payable by "ABC" Factory on this special sales order. The production manager of "ABC" Factory analyzed the impact of this special sales order on the net income expected for the year 2009 as follows: ". Our manufacturing costs would increase by 100000 shirts X LE6 (per shirt manufacturing costs) = L.E600000, but our selling and administrative expenses would go up by the L.E40000, the sales commission on the special sales order. That would mean additional net income of [100000 shirts x (L.E 7 L.E 6] L.E 40000 = L.E 60000]" Required: (A) Prepare a contribution margin based income statement for the year ended December 31, 2005. (B) For the Coming year 2006, compute the expected additional net income if the 100000 shirts of the special order are to be produced and sold in addition to the production and sales of the usual one million shirts. Arrange your answer in a three columns table without the special sales order, the effect of the special sales order (total and L.E per unit). And totals with the special sales order. (C) Do you agree with the production manager analysis of the impact of the special sales order on net income? Why? (D) Assuming that the special sales order for 250000 shirts and would have filled the factory capacity completely, and selling price offered L.E38 per shirt. There would have been no sales commission, and no variable selling expenses for the special sales order because the buyer would pay for the shipping expenses. The Chairman of "ABC" Factory argument for the acceptance of such order as follows: ".. Our fixed manufacturing costs would have been spread over 1.25 million shirts instead of one million shirts. The added volume would reduce that cost than our loss on our per unit variable costs" Is this argument correct' Why? Prepare the income statement showing the impact of the acceptance of this special order on net income expected for the year 2006.