Q No.

1 Evaluating a Special Order

Clean-it Company produces cleaning kits for shotguns. The production capacity available will enable the
firm to produce 500,000 kits annually. A projected income statement for next year shows

Sales (460,000 kits) $4,600,000

Costs of goods sold 2,960,000
Gross profit 1,640,000
Selling and administrative expenses 1,250,000
Net income $ 390,000

Fixed manufacturing overhead costs included in the cost of goods sold are $ 1,120,000. A 10% sales
commission is paid to sales representatives for each kit sold. The purchasing department of a large
discount chain has offered to purchase 30,000 kits at $6 each. The Clean-it Company sales manager’s
initial response is to refuse the offer because he concludes that the $6 price is below the firm’s average
cost 2,960,000/460,000. The sales commission would not be paid on the special order.

Required:
A. Should the special offer be accepted? What would be the impact on net income?
B. Assume that the offer was for 50,000 kits. Should it be accepted? Show your
calculations.
C. Ignore part B. What is the lowest price the firm could accept if it wants to earn annual
net income of $480,000?

Dixon Company manufactures part 347 for use in one of its main products.
Normal annual production for part 347 is 100,000 units. The costs per 100 units is as follows

Direct material………………... $260

Direct labor………………....... 100
Manufacturing overhead:
Variable ………………............ 120
Fixed ………………................ 160
Total costs per 100 units…….. $640

Cext Company has offered to sell Dixon all 100,000 units it will need during the coming year for
$600 per 100units. If Dixon accepts the often from Cext, the facilities used to manufacture part
347 could be used in the production of part 483. This change would save Dixon $90,000 in
relevant costs. Also, a $100,000 cost item included in the fixed factory overhead that is
specifically related to part 347 would be eliminated. Should Dixon Company accept the offer
from Cext Company?