Problem 10-1A: Analysis of income effects of additional business L.O.

C1, A1 Jones Products manufactures and sells to wholesalers approximately 400,000 packages per year of underwater markers at $6 per package. Annual costs for the production and sale of this quantity are shown in the table.

Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses

$ 576,000 144,000 320,000 150,000 100,000 $1,290,000

A new wholesaler has offered to buy 50,000 packages for $5.20 each. These markers would be marketed under the wholesaler’s name and would not affect Jones Products’ sales through its normal channels. A study of the costs of this additional 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 one-and-one-half times the usual labor rate. • 25% of the normal annual overhead costs are fixed at any production level from 350,000 to 500,000 units. The remaining 75% of the annual overhead cost is variable with volume. • Accepting the new business would involve no additional selling expenses. • Accepting the new business would increase administrative expenses by a $5,000 fixed amount. Required Prepare a three-column comparative income statement that shows the following (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response): 1. Annual operating income without the special order (column 1). 2. Annual operating income received from the new business only (column 2). 3. Combined annual operating income from normal business and the new business (column 3). Jones PRODUCTS Comparative Income Statements (1) (2) New Normal Volume Business Sales Costs and expenses Direct materials Direct labor Overhead Selling expenses Administrative expenses $ $ $

(3) Combined

Total costs & expenses Operating income $ $ $ .

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