learning objective 20 2 1 special sales orders increase operating income if the reve 4311301

Learning Objective 20-2

1) Special sales orders increase operating income if the revenue from the order exceeds the incremental variable and fixed costs incurred to fill the order.

2) In deciding whether to accept a special sales order, management should consider the quantitative data ONLY and disregard qualitative factors.

3) Fixed costs are relevant to a special sales order decision if those fixed costs are subject to change as a result of the special order.

4) Origami Company is a price-taker and uses target pricing.  Please refer to the following information:

Production volume	500,000	Units per year
Market price	$24.00	Per unit
Desired operating profit	12%	Of total assets

Revenue at market price plus the desired operating profit equals the product's target full cost.

5) When a company is a price-setter, that means that the company has flexibility in setting its price and may choose to use the cost-plus methodology.

6) If a company is a price-taker, it has considerable flexibility in setting its products' prices.

7) Potlatch Company manufactures sonars for fishing boats.  Model 100 sells for $200.  Potlatch produces and sells 5,000 of them per year.  Cost data are as follows:

Variable manufacturing	$105.00	Per unit
Variable marketing	$5.00	Per unit
Fixed manufacturing	$270,000	Per year
Fixed marketing & admin	$140,000	Per year

The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats.  He proposes a sale of 30 units at a special price of $140 per unit.  He says it will not cannibalize the company's regular sales and is a one-time transaction.  It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way.  The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,000 to operating income.  Based on the president's criteria, Potlatch will decline the offer.

8) Potlatch Company manufactures sonars for fishing boats.  Model 100 sells for $200.  Potlatch produces and sells 5,000 of them per year.  Cost data are as follows:

Variable manufacturing	$105.00	Per unit
Variable marketing	$5.00	Per unit
Fixed manufacturing	$270,000	Per year
Fixed marketing & admin	$140,000	Per year

A potential deal has come up for a one time sale of 25 units at a special price of $105 per unit.  The marketing manager says that the sale will not negatively impact the company's regular sales activities, but it will require the normal amount of variable marketing costs.  The production manager says that there's plenty of excess capacity and the deal will not impact fixed costs in any way.  The controller points out, however, that because the incremental revenues are just equal to the incremental costs to fill the order, the deal will not have any impact on the bottom line whatever.  The controller is correct in his statement.

9) Which of the following is NOT a major consideration when analyzing a special order?

A) Will the price be high enough to cover any incremental costs to fill the order?

B) Does the company have excess capacity available?

C) Will the profit margin of the special sale be as high as regular sales?

D) Will the special order negatively impact regular sales?

10) Origami Company is a price-taker and uses target pricing.  Please refer to the following information:

Production volume	500,000	Units per year
Market price	$24.00	Per unit
Desired operating profit	12%	Of total assets
Total assets	$12,500,000

How much is the desired profit for the year?

A) $1,440,000

B) $11,000,000

C) $12,000,000

D) $1,500,000

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