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Question Special Order, Terminology, and Unit Costs Following the income statement

Question : Question Special Order, Terminology, and Unit Costs Following the income statement : 1054429


Special Order, Terminology, and Unit Costs Following is the income statement of Pelle Company, a manufacturer of men’s blue jeans: Pelle Company Income Statement for the Year Ended December 31, 20X0 Total Per Unit Sales $77,000,000 $35.00 Less: Cost of goods sold 46,200,000 21.00 Gross margin $30,800,000 $14.00 Less selling and administrative expenses 28,600,000 13.00 Operating income $ 2,200,000 $ 1.00 Pelle had manufactured 2.2 million pairs of jeans, which had been sold to various clothing wholesalers and department stores. At the start of 20X0, the president, Ruth Catone, died unexpect-edly. Her son, Chuck, became the new president. Chuck had worked for 15 years in the market-ing phases of the business. He knew very little about accounting and manufacturing, which were his mother’s strengths. Chuck has several questions, including inquiries regarding the pricing of special orders. 1. To prepare better answers, you decide to recast the income statement in contribution form. Variable manufacturing cost was $35.2 million. Variable selling and administrative expenses, which were mostly sales commissions, shipping expenses, and advertising allowances paid to customers based on units sold, were $16.5 million. Prepare the revised income statement. 208PART 1 • FOCUS ON DECISION MAKING CHAPTER 5 2. Chuck asks, “I can’t understand financial statements until I know the meaning of various terms. In scanning my mother’s assorted notes, I found the following pertaining to both total and unit costs: full manufacturing cost, variable cost, full cost, fully allocated cost, gross margin, and con-tribution margin. Using our data for 20X0, please give me a list of these costs, their total amounts, and their per-unit amounts.” 3. He also says, “Near the end of 20X0, I brought in a special order from Costco for 140,000 jeans at $34 each. I said I’d accept a flat $47,600 sales commission instead of the usual 5% of selling price, but my mother refused the order. She usually upheld a relatively rigid pricing policy, say-ing that it was bad business to accept orders that did not at least generate full manufacturing cost plus 65% of full manufacturing cost. That policy bothered me. We had idle capacity. The way I figured, our manufacturing costs would go up by 140,000 * $21 = $2,940,000, but our selling and administrative expenses would go up by only $47,600. That would mean additional operating income of 140,000 * ($34 - $21) minus $47,600, or $1,820,000 minus $47,600, or $1,772,400. That’s too much money to give up just to maintain a general pricing policy. Was my analysis of the impact on operating income correct? If not, please show me the correct additional operating income.”

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