Question 1 - Relevant Costing - Accepting Special Order (10 marks)

Following is the budgeted income statement for Karibu Inc.:

Sales (15,000 Units @ $60)$ 900,000

Less: Cost of Goods Sold:

Direct Materials$150,000

Direct Labour$300,000

Variable Overhead$60,000

Fixed Overhead$225,000

Cost of Goods Sold$735,000

Gross Profit$165,000

Less: Operating Expenses:

Sales Commission (2% of Sales)$18,000

Delivery Expense (Var.)$90,000

Sales Salaries (Fixed)$30,000

Administrative (Fixed)$12,000

Total Operating Expenses$150,000

Operating Income$ 15,000

Additional Information:

Maximum plant capacity = 18,000 units (it can be increased to 30,000 units for an additional cost of $ 28,000) Karibu Inc. received a special order from Habari Inc. to purchase 6,000 units @ $50 per unit. Habari Inc. will pay the delivery costs. The special order will not affect the demand from the regular customers and sales commissions will be paid on the special order.

a. Assume that if Karibu accepted the special order, it will have to give up sales to its regular customers. What is the net change in operating income if Karibu accepts the special order? Show your work for part marks.

b. Assume that if Karibu accepted the special order, it will expand capacity to accommodate the special order. What is the net change in operating income if Karibu accepts the special order? Show your work for part marks.