Special Order Decision

All yellow cells must be a formula or cell reference in order to get full credit.

1.

Incremental revenue:

Fixed fee

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Reimbursement for costs of production

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Total incremental revenue

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Less Incremental costs:

Variable production costs

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Increase in net operating income

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2.

Sales:

Sales revenue through regular channels

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Sales revenue from the university

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Decrease in revenue received

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Less variable selling expenses avoided if the

university's offer is accepted

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Net decrease in net operating income with

the university's offer

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Note: The variable production costs are not relevant in requirement (2) because those

costs are not differentialthey will occur regardless if we sell to regular customers or to

the university.

Facts
The Tracey Company produces cross-country ski poles that sell for $32 a pair. Operating at
capacity, the company can produce 50,000 pairs of ski poles a year. Costs associated with
this level of production and sales are given below:
				Per Pair		Total
Direct materials				$12		$600,000
Direct labor				3		150,000
Variable manufacturing overhead				1		50,000
Fixed manufacturing overhead				5		250,000
Variable selling expenses				2		100,000
Fixed selling expenses				4		200,000
Total cost				$27		$1,350,000
Required
1. The University of Colorado would like to make a one-time only purchase of 10,000
pairs of ski poles. The university would pay a fixed fee of $4 per pair, and in addition
it would reimburse Hawkins Industries for its unit manufacturing costs (both fixed
and variable). Due to a recession, the company would otherwise produce and sell
only 40,000 pairs of ski poles this year. (Total fixed manufactuirng overhead cost would
be the same whether 40,000 pairs or 50,000 pairs of ski poles were produces.) The
company would not incur its usual variable selling expenses with this special order.
If Hawkins Industries accepts the university's offer, by how much would net operating
income increase or decrease from what it would be if only 40,000 pairs of ski poles
were prodcued and sold during the year?
2. Assume the same situation as described in (1) above, except that the company
is already operating at capacity and could sell 50,000 pairs of ski poles through regular
channels. Thus, accepting the university's offer would require giving up sales of 10,000
pairs at the normal price of $32 a pair. If the university's offer is accepted, by how much
will net operating income increase or decrease from what it would be if the 10,000
pairs were sold through regular channels?