Question 2

ABC Company supplies schools with floor mattresses to use in physical education classes. ABC has received a special order from a large school district to buy 600 mats at $45 each. Acceptance of the special order will not affect fixed costs but will result in $1,200 of shipping costs.

For the first 6 months of 2016, the company reported the following operating results while operating at 80% capacity:

Sales (100,000 units) $7,000,000

Cost of goods sold 4,200,000

Gross profit 2,800,000

Operating expenses 2,000,000

Net income $ 800,000

Cost of goods sold was 75% variable and 25% fixed; operating expenses were 70% variable and 30% fixed.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should ABC Company accept the special order? Justify your answer.