Problem 28

Prepare an incremental analysis in good form for each of the two cases below as support for your decision.

Case 1

Dons Donuts budgets the following costs for the production of 36,000 boxes of donuts next year: Rent, $20,000; other fixed costs, $6,000; direct materials, $43,200, and direct labor, $30,600. The normal selling price is $4.20 per box. The Duval County Police Department has offered to pay Dons $3.15 per box to supply them with 10,000 boxes of donuts during the year. This will eliminate police officers from visiting donut shops in an effort to improve the image of law enforcement personnel. Assuming that Dons has the capacity to fill this order along with their other production and that accepting this order will not cause problems with any of their other customers, should Dons Donuts accept this order? Provide a single column incremental analysis to support your answer.

Case 2

Big Bagels makes and sells 25,000 giant bagels each month. Capacity is 28,000 bagels. The unit cost of making one bagel at this activity level follows:

Direct material	$0.23
Fixed manufacturing overhead	0.32
Direct labor	0.11
Variable manufacturing overhead	0.14

A new retail store has offered to buy 2,200 bagels at $0.82 per bagel even though regular customers pay $0.99 each. Fixed costs are allocated to products and are unavoidable. Prepare a single column incremental analysis in good form to determine is Big Bagels should accept the order for 2,200 bagels.

Explain the nature of 'allocated' fixed costs and why they are often irrelevant.