Ludolph Industries has an annual plant capacity of 68,000 units; current production is 50,000 units per year. At the current production volume, the variable cost per unit is $33.00 and the fixed cost per unit is $4.80. The normal selling price of Ludolph's product is $49.00 per unit. Ludolph has been asked by Abbott Company to fill a special order for 14,000 units of the product at a special sales price of $22.00 per unit. Abbott is located in a foreign country where Ludolph does not currently operate. Abbott will market the units in its country under its own brand name, so the special order is not expected to have any effect on Ludolph's regular sales.

Requirement

1. How would accepting the special order impact Ludolph​'s operating​ income? Should Ludolph accept the special​ order?

Complete the following incremental analysis to determine the impact on Ludolph​'s operating income if it accepts this special order

Revenue from special order
Less expenses associated with the order:
Variable manufacturing cost
Contribution margin
Less: Additional fixed expenses associated with the order
Increase (decrease) in operating income from the special order.

Requirement 1 - This special order is loss-making. So Ludolph not accept the special order

Requirement 2- In this case, a special order is profit making. So Ludolph accepts the special order.

Explanation:

Requirement 1

Incremental analysis of special                                                    Total order

   sales order decision                                                                    14000 units

Revenue from special order           14000*22                                     308000

Less: variable cost                           14000*33                                  462000

Contribution margin                                                                          -154000

Less: fixed cost

                                                                                                               0

Additional net loss                                                                             -154000

This special order is loss-making. So Ludolph not accept the special order

Requirement 2

Incremental analysis of special                                                    Total order

   sales order decision                                                                    14000 units

Revenue from special order            14000*36                                 504000

Less: variable cost                           14000*33                                 462000

Contribution margin                                                                          42000

Less: fixed cost

                                                                                                            13000

Additional net loss                                                                               29000

In this case, a special order is profit making. So Ludolph accepts the special order.

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