Question
Calla Company produces skateboards that sell for $55 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling
Calla Company produces skateboards that sell for $55 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 80,000 skateboards per year. Annual costs for 80,000 skateboards follow.
Direct materials | $ | 864,000 | |
Direct labor | 616,000 | ||
Overhead | 944,000 | ||
Selling expenses | 554,000 | ||
Administrative expenses | 472,000 | ||
Total costs and expenses | $ | 3,450,000 | |
A new retail store has offered to buy 15,000 of its skateboards for $50 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 80,000 units to 95,000 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 $1.20 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?
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