Question

Calla Company produces skateboards that sell for $65 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 81,500 skateboards per year. Annual costs for 81,500 skateboards follow. Direct materials $ 937,250 Direct labor 643,850 Overhead 947,000 Selling expenses 553,000 Administrative expenses 467,000 Total costs and expenses $ 3,548,100 A new retail store has offered to buy 8,500 of its skateboards for $60 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 81,500 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 $2.40 per unit selling expense for this order. Administrative expenses would increase by a $1,000 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?

Answer 1

CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
	Normal Volume	Additional Volume	Combined Total
Sales	5,297,500	510,000	5,807,500
Costs and expenses:
Direct materials	937,250	97,750	1,035,000
Direct labor	643,850	67,150	711,000
Overhead	947,000	59,260	1,006,260
Selling expenses	553,000	66,540	619,540
Administrative expenses	467,000	1000	468,000
Total costs and expenses	3,548,100	291,700	3,839,800
Operating income	1,749,400	218,300	1,967,700
2
Yes, accept the order

Workings:
	Additional volume:
Sales	510,000	=8500*60
Costs and expenses:
Direct materials	97,750	=937250/81500*8500
Direct labor	67,150	=643850/81500*8500
Overhead	59,260	=(947000*60%)/81500*8500
Selling expenses	66,540	=(553000*80%)/81500*8500+(8500*2.4)