QUESTION 1

Consider the following details of the income statement of the Computer Division of the GK Electronics Company for the year ended December 31, 2016:

	$
Sales	10,000,000
Less: manufacturing cost of goods sold	6,000,000
Gross profit	4,000,000
Less: selling and administrative expenses	3,300,000
Operating income	700,000

Computer Divisions fixed manufacturing costs were $2.4 million and its fixed selling and administrative costs were $2.5 million. Sales commissions of 3% of sales are included in selling and administrative expenses.

The division had sold 2 million computers. Near the end of the year, King Burger offered to buy 150,000 computers on a special order. To fill the order, a special King Burger logo would have to be added to each computer. King Burger intended to use the computers in special promotions in the western parishes during the early 2017.

Even though the Computer Division had some idle plant capacity, the president rejected the King Burger offer of $600,000 for the 150,000 computers. He said:

The King Burger offer is too low. Wed avoid paying sales commissions, but wed have to incur an extra cost of $0.20 per computer to add the logo. If the Computer Division sells below its regular selling prices, it will begin a chain reaction of competitors price cutting and of customers wanting special deals. I believe in pricing at no lower than 8% above our full costs of $9,300,000/2,000,000 units = $4.65 per unit plus the extra$0.20 per computer less savings in commissions.

Required:

1. Using the contribution approach, prepare an analysis using four columns: without the special order, the effect of the special order (total and per unit)and totals with special order. (10 marks)
2. By what percentage would operating income increase or decrease if the order had been accepted? (2 marks)
3. Do you agree with presidents decision? Why? (3 marks)

(Total 15 marks)