Bonilla Ltd There Were No Beginning or Ending Inventories of Work-In-Process or Statement

Essay

Bonilla Ltd., which produces one product, had the following income statement for a recent month: $\begin{array}{c}\text {Bonilla Ltd.}\\\text {Income Statement}\\\text {For the Month of April 2011}\\\\\begin{array}{lr}\text { Sales } & £ 30,000 \\\text { Cost of goods sold } & -\underline{27,000} \\\text { Gross profit } & {£ 3,000}\\ \text { Selling and administrative } &2,500 \\\text { Net income }&£ 500\end{array}\end{array}$
There were no beginning or ending inventories of work-in-process or finished goods. Bonilla's manufacturing costs were as follows: $\begin{array}{lr}\text { Direct materials }(1,200 \text { units } \times £ 5) & £ 6,000 \\\text { Direct labour }(1,200 \text { units } \times £ 8) & 9,600 \\\text { Variable overhead (1,200 units } \times £ 4.50) & 5,400 \\\text { Fixed overhead } & \underline{627,000} \\\text { Total } & \underline{£ 27,000} \\\\\text {Average cost per unit}&\underline{£ 22.50}\end{array}$
Selling and administrative expenses are all fixed.
Bonilla has just received a special order from a firm in Canada to purchase 800 units at £20 each. The order will not affect the selling price to regular customers.

a.Prepare a differential analysis of the relevant costs and revenues associated with the decision to accept or reject the special order, assuming Bonilla has excess capacity.
b.Determine the net advantage or disadvantage (profit increase or decrease) of accepting the order, assuming Bonilla does not have excess capacity.