Exercise #1 (Special Order):

The ABC Company is a manufacturer of coffee makers, which it then sells to retail stores such as Walmart, Target, etc. During the first half of the year, the company reported the following operating results while operating at 80% of plant capacity:

Sales (500,000 units) $90,000,000

Cost of goods sold 54,000,000

Gross profit 36,000,000

Operating expenses 24,000,000

Net income $12,000,000

An analysis of costs and expenses reveals that variable cost of goods sold is $95 per unit and variable operating expenses are $35 per unit.

In September, the ABC company received a request for a special order for 40,000 machines at $135 each from a major coffee shop franchise. Acceptance of the order would result in $10,000 of shipping costs but no increase in fixed expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should the ABC Company accept the special order? Justify your answer.