Question 1 (20 marks) Incremental Analysis

ABC Company manufactures coffee makers. For the first eight months of 2020, 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 $115 per unit and variable operating expenses are $41 per unit.

In September, ABC Company receives a special order for 38,000 machines at $162 each from a major coffee shop franchise. Acceptance of the order would result in $13,000 of shipping costs but no increase in fixed expenses.

Instructions

1. Prepare an incremental analysis for the special order. (10 marks)
2. Should ABC Company accept the special order? Justify your answer. (3 marks)
3. Should ABC Company accept the special order if ABC Company receives a special order for 38,000 machines at $120 per unit? Justify your answer. (7 marks)