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 2,100 of the US umbrellas at a price of $17 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	$	8.00
Direct labor		4.00
Variable manufacturing overhead		4.00
Fixed manufacturing overhead		2.50
Total cost	$	18.50
Regular sales price	$	25.00

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



2. Should Mohave accept the special order?

	Yes
	No

3. Suppose that the special order had been to purchase 2,600 umbrellas for $15.00 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. Computation of Incremental Profit/ (Loss) from accepting Special Order.

Number of umbrellas in special order =2,100

Price Lost Mine is offering                   =$17

Total cost to make one umbrella (Excluding Fixed Manufacturing OH) =8+4+4=16

Profit per umbrella   =17-16=1

Profit from 2,100 umbrellas=2100*1=2100

2.Yes offer should be Accepted,

Since there is increase an operating income by 2100.hence the special order should be accepted.

3.Computation of Incremental Profit/ (Loss) from accepting Special Order.

Number of umbrellas in special order =2,600

Price Lost Mine is offering                   =$15

Total cost to make one umbrella (Excluding Fixed Manufacturing OH) =8+4+4=16

Profit per umbrella   =15-16=-1

Profit from 2,100 umbrellas=2600*-1=-2600

4.Special order price is same as market sale price 25,since special order price is same as that of market price if operating at full capacity, hence it is indifferent between accepting or rejecting special order