CVP analysis, decision making. Consider the following details of the income statement of Fountain Pen Ltd, a Swedish company that produces special pens, for the last year

Revenues 10,000,000 kr

Cost of goods sold (manufacturing) 6,000,000 kr

Gross margin 4,000,000 kr

Selling and administrative costs 3,100,000 kr

Operating income 900,000 kr

Note: The krona (kr) is the official currency of Sweden

Even though Fountain Pen Ltd has some idle plant capacity, the president rejects King Burgers offer of 660,000 kr for the 150,000 pens. He said that King Burgers offer is too low. While Fountain Pen would avoid paying commission, it would incur an extra cost of 0.20 kr per clip for the emblem and assembling it with the pens. If Fountain Pen reduced its selling price, it would begin a chain reaction of competitors price-cutting and of customers wanting special deals.

Fountain Pen wants to sell at no lower than 8% above its full cost of 9,100,000 kr (2,000,000 @ 4.55kr), plus the extra 0.20 kr per clip less the savings in commissions.

1. Compute the variable cost per unit for:

a. manufacturing cost

b. selling and administrative costs

2. Compute the incremental contribution margin of accepting the order.

3. By what percentage would operating income increase or decrease if King Burgers order had been accepted?

4. Do you agree with the presidents decision? Why?