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.

Loss or Profit by _____
2. Should Mohave accept the special order?

Yes or No
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.

Profit or Loss by ____
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.

Special Order Price ____ Per unit

Answer 1

Only variable cost should be considered for special order.

Cost per unit = $9 + $5 + $5.50 = $19.50

1.

Incremental profit (loss) = ($20 - $19.50) X 2,400 = $1,200 incremental profit

2.

Yes. The special order should be accepted.

3.

Incremental profit (loss) = ($17 - $19.50) X 2,900 = ($7,250) incremental loss

4.

At full capacity the special order should be accepted at regular price because, even if the special order is not accepted the units will be sold at a regular price.

$28 per unit