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 2,400 of the US umbrellas at a price of $20 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	$	9.00
Direct labor		5.00
Variable manufacturing overhead		5.50
Fixed manufacturing overhead		2.50
Total cost	$	22.00
Regular sales price	$	28.00

Required:
1. Compute the incremental profit (or loss) from accepting the special order.
2. Should Mohave accept the special order?
3. Suppose that the special order had been to purchase 2,900 umbrellas for $17.00 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
	Per unit	Total 2400 units
Incremental revenue	20.00	48000
Incremental costs:
Direct materials	9.00	21600
Direct labor	5.00	12000
Variable manufacturing overhead	5.50	13200
Total Incremental costs		46800
Incremental net operating income(loss)		1200
Profit(or loss) increases by 1200
2
Yes, accept the special order
3
	Per unit	Total 2900 units
Incremental revenue	17.00	49300
Incremental costs:
Direct materials	9.00	26100
Direct labor	5.00	14500
Variable manufacturing overhead	5.50	15950
Total Incremental costs		56550
Incremental net operating income(loss)		(7250)
Profit(or loss) decreases by 7250
4
Special order price should be same as Regular sales price
Special order price	28.00