Question

Windmire Company manufactures and sells to local wholesalers approximately 300,000 units per month

at a sales price of \(4 per unit. Monthly costs for the production and sale of this quantity follow.

Direct materials . \)384,000

Direct labor 96,000

Overhead . 288,000

Selling expenses 120,000

Administrative expenses . 80,000

Total costs and expenses \(968,000

A new out-of-state distributor has offered to buy 50,000 units next month for \)3.44 each. These units

would be marketed in other states and would not affect Windmire’s sales through its normal channels. A

study of the costs of this new business reveals the following:

Direct materials costs are 100% variable.

Per unit direct labor costs for the additional units would be 50% higher than normal because their production

would require overtime pay at 1½ times their normal rate to meet the distributor’s deadline.

Twenty-five percent of the normal annual overhead costs are fixed at any production level from

250,000 to 400,000 units. The remaining 75% is variable with volume.

Accepting the new business would involve no additional selling expenses.

Accepting the new business would increase administrative expenses by a $4,000 fixed amount.

Required

Prepare a three-column comparative income statement that shows the following:

1. Monthly operating income without the special order (column 1).

2. Monthly operating income received from the new business only (column 2).

3. Combined monthly operating income from normal business and the new business (column 3).

Short answer

The combined operating income is $276,000.

Step-by-step solution

Definition of variable cost

The variable cost is the cost that changes according to the production level or other activities.

Annual operating income

	Total
	Normal Volume	New Business	Combined
Sales	$1,200,000	$172,000	$1,372,000
Variable Cost:
Direct Material	$384,000	$64,000	$448,000
Direct Labor	$96,000	$24,000	$120,000
Variable Overhead	$216,000	$36,000	$252,000
Total variable Cost	$696,000	$124,000	$820,000
Contribution Margin	$504,000	$48,000	$552,000
Fixed Costs:
Fixed Overhead	$72,000		$72,000
Selling Expenses	$120,000		$120,000
Administrative Expenses	$80,000	$4,000	$84,000
Total Fixed Cost	$272,000	$4,000	$276,000
Operating Income	$232,000	$44,000	$276,000

$\begin{array}{rcl}& & \text{Cost} \text{Per} \text{Unit =}\frac{\text{Direct} \text{Material} \text{Cost}}{\text{Unit} \text{of} \text{Output}}\\ & & \text{=}\frac{\text{\$ 384,000}}{\text{300,000}}\\ & & \text{= 1.28}\\ & & \end{array}$