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Please note the details in the calculation of Monarch Pen Company's Profit and Loss for the year ended December 31, 2008: Sales $10,000,000 Minus The

Please note the details in the calculation of Monarch Pen Company's Profit and Loss for the year ended December 31, 2008:

Sales

$10,000,000

Minus The Cost of Goods Sold

$6,000,000

Gross Profit

$4,000,000

Minus Sales and Administration Costs

$3,100,000

Operating Profit

$900,000

Monarch Pen Company's Fixed manufacturing cost was $2.4 million, and its fixed sales and administration costs were $2.3 million. A sales commission of 3% of sales is included in the cost of sales and administration.

The company already sold 2 million pens. Towards the end of the year, the McDonald's company, a well-known company that makes hamburgers, made an offer to buy 150,000 pens with special orders. To fulfill the order, a special clamp with a McDonald's emblem is required. The McDonald's company intended to use the pen for a special promotion in early 2009.

Although Monarch Pen Company has some of the plant's idle capacity, the company's directors rejected McDonald's offer of $660,000 for its 150,000-pen order. It says:

McDonald's deals are too low. We've managed to avoid a sales commission, but then have to spend an extra $0.20 per clamp on the emblem and put it on the pen. If monarch pen company sells below the usual selling price, it will provoke a continuous reaction from competitors who make price cuts, and from customers who want a special deal. I set a price that is never lower than 8 percent above the integral cost (Full cost = Full cost) $9,100,000 / 2,000,000 = $4.55 per unit, plus an extra $0.20 per clamp, minus the savings in commissions.

Asked:

a. Using the contribution approach, make a 4-column analysis: without special orders, with special orders, and the differences in special orders are shown in quantity and in units.

b. What percentage of operating profit will increase or decrease, if the order is received? Do you agree with the director's decision? Why is it?

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