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Camino Company manufactures designer to-go coffee cups
Camino Company manufactures designer to-go coffee cups. Each line of coffee cups is endorsed by a high-profile celebrity and designed wtth special elements selected by the celebrity. During the most recent year, Camino Company had the following operating results while operating at 85 percent (85,000 units) of Its capacity:
J Sales revenue $1,445,000 Cost of goods sold 637,500 Gross profit $ 807,500 Operating expenses 53,125 Net operating income 754,375
Camino's cost of goods sold and operating expenses are 80 percent variable and 20 percent fixed. Camino has received an offer from a professional wrestling association to design a coffee cup endorsed by Its biggest star and produce 14,000 cups for $11 each (total $154,000). These cups would be sold at wrestling matches throughout the United States. Acceptance of the order would require a $56,000 endorsement fee to the wrestling star, but no other increases in fixed operating expenses.
Required: 1. Complete the incremental analysis of the special order in the table provided below. 2. Should Camino accept this special order? 3. If Camino were operating at full capacity, what price would Camino require for the special order?
Expert Solution
1)
| Incremental Analysis: | ||
| Particulars | Per Cup | Total |
| Incremental Revenue | $11 | 154000 |
| Less: Incremental Costs | ||
| Variable cost of goods sold | $6 | $84,000 |
| Variable Opereting Expenses | $0.50 | $7,000.00 |
| Endorsment Fee | 4 | 56000 |
| Incremental Profit | $0.50 | $7,000.00 |
Workings:
| Amount | Fixed 20% | Variable 80% | |
| Sales Revenue | $1,445,000 | ||
| Cost of goods sold | $637,500 | $127,500 | $510,000 |
| Gross profit | $807,500 | ||
| Opereting Expense | $53,125 | $10,625 | $42,500 |
| Net Opereting Income | $754,375 | ||
| Variable 80% | Unit | Per Unit | |
| Cost of goods sold | $510,000 | 85000 | $6.00 |
| Operating Expense | $42,500 | 85000 | $0.50 |
2) Yes, Camino should accept this special order.
3) Computation of Price per Cup:
| Variable cost ($6*14000) | 84000 |
| Add: Contribution to be lost ($17-$6)*14000 | 154000 |
| Add : Additional cost | 56000 |
| Total cost | 294000 |
| Special order cups | 14000 |
| Price per cup | 21.00 |
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