Question

Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.

Lost Mine has offered to buy 2,800 of the US umbrellas at a price of $26 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:   

Direct materials $ 11.00
Direct labor 6.00
Variable manufacturing overhead 7.50
Fixed manufacturing overhead 2.50
Total cost $ 27.00
Regular sales price $ 34.00

Required:
1. Compute the incremental profit (or loss) from accepting the special order.



2. Should Mohave accept the special order?

No
Yes

3. Suppose that the special order had been to purchase 3,300 umbrellas for $24.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.



4. Assume that Mohave is operating at full capacity. Calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order.

Answer 1

1	Incremental Profit or Loss
	Sales Revenue	2800*26	72800
	Less : Variable Expenses
	Direct Materials	2800*11	30800
	Direct Labor	2800*6	16800
	Variable Manufacturing overhead	2800*7.50	21000
	Incremental Profit (Loss)		4200
2	Mohave should accept the special order due to increase in profit by $ 4200
3	Sales Revenue	3300*24	79200
	Less : Variable Expenses
	Direct Materials	2800*11	30800
	Direct Labor	2800*6	16800
	Variable Manufacturing overhead	2800*7.50	21000
	Incremental Profit (Loss)		10600
4	The minimum price that should be charge is (11+6+7.50)			24.50