Question

# Calla Company produces skateboards that sell for \$64 per unit. The company currently has the capacity...

Calla Company produces skateboards that sell for \$64 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 81,000 skateboards per year. Annual costs for 81,000 skateboards follow.

 Direct materials \$ 955,800 Direct labor 664,200 Overhead 954,000 Selling expenses 541,000 Administrative expenses 465,000 Total costs and expenses \$ 3,580,000

A new retail store has offered to buy 9,000 of its skateboards for \$59 per unit. The store is in a different market from Calla's regular customers and would not affect regular sales. A study of its costs in anticipation of this additional business reveals the following:

• Direct materials and direct labor are 100% variable.
• 40 percent of overhead is fixed at any production level from 81,000 units to 90,000 units; the remaining 60% of annual overhead costs are variable with respect to volume.
• Selling expenses are 80% variable with respect to number of units sold, and the other 20% of selling expenses are fixed.
• There will be an additional \$1.60 per unit selling expense for this order.
• Administrative expenses would increase by a \$840 fixed amount.

Required:
1. Prepare a three-column comparative income statement that reports the following:

a. Annual income without the special order.
b. Annual income from the special order.

2. Should Calla accept this order?

 CALLA COMPANY COMPARATIVE INCOME STATEMENTS Normal Volume Additional Volume Combined Total Costs and expenses: Total costs and expenses Operating income

 Comparative Income statement Normal Volume Additional Volume Combined Total Sales 5184000 531000 5715000 Costs and expenses: Direct Material 955800 106200 1062000 Direct Labour 664200 73800 738000 Variable overheads 572400 63600 636000 Variable selling expenses 432800 62489 495289 Fixed overheads 381600 0 381600 Fixed selling expenses 108200 0 108200 Administrative expenses 465000 840 465840 Total costs and expenses(Variable+Fixed costs) 3580000 306929 3886929 Operating income(Sales-Total costs) 1604000 224071 1828071

2.Yes,Calla should accept the offer as it will lead to additional income of \$224071

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