Question
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:
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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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