Cost of goods sold was 70 % variable and 30 % fixed; operating expenses were 80 % variable and 20 % fixed.
In September, Moonbeam receives a special order for 15,000 toasters at $ 7.60 each from Luna Company of Ciudad Juarez. Acceptance of the order would result in an additional $ 3,000 of shipping costs but no increase in fixed costs.
Instructions
� Prepare an incremental analysis for the special order.
� Should Moonbeam accept the special order? Why or why not?
E7-7
Riggs Company purchases sails and produces sailboats. It currently produces 1,200 sailboats per year, operating at normal capacity, which is about 80 % of full capacity. Riggs purchases sails at $ 250 each, but the company is considering using the excess capacity to manufacture the sails instead. The manufacturing cost per sail would be $ 100 for direct materials, $ 80 for direct labor, and $ 90 for overhead. The $ 90 overhead is based on $ 78,000 of annual fixed overhead that is allocated using normal capacity.
The president of Riggs has come to you for advice. ― It would cost me $ 270 to make the sails,‖ she says, ― but only $ 250 to buy them. Should I continue buying them, or have I missed something?‖
Instructions
a. Prepare a per unit analysis of the differential costs. Briefly explain whether Riggs should make or buy the sails.