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P7-1B Morello Inc. manufactures basketballs

Price: $2.50


Morello Inc. manufactures basketballs for the National Basketball Association
(NBA). For the first 6 months of 2014, the company reported the following operating
results while operating at 90% of plant capacity and producing 90,000 units.

  Amount Per unit
Sales   4,500,000 50
Cost of goods sold   3,060,000 34
Selling and administrative expenses   360,000 4
Net income   1,080,000 88

Fixed costs for the period were cost of goods sold $900,000, and selling and administrative
expenses $180,000.
In July, normally a slack manufacturing month, Morello receives a special order for
10,000 basketballs at $30 each from the Chinese Basketball Association (CBA). Acceptance
of the order would increase variable selling and administrative expenses $0.50 per unit
because of shipping costs but would not increase fixed costs and expenses.

Instructions
(a) Prepare an incremental analysis for the special order.
(b) Should Morello Inc. accept the special order?
(c) What is the minimum selling price on the special order to produce net income of $5.50
per ball?

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