Question

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.
c. Combined annual income from normal business and the new business.

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

Answer 1

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