Question
Calla Company produces skateboards that sell for $57 per unit. The company currently has the capacity to produce 100,000 skateboards per year, but is selling
Calla Company produces skateboards that sell for $57 per unit. The company currently has the capacity to produce 100,000 skateboards per year, but is selling 82,000 skateboards per year. Annual costs for 82,000 skateboards follow.
Direct materials $ 893,800
Direct labor 623,200
Overhead 943,000
Selling expenses 551,000
Administrative expenses 466,000
Total costs and expenses $ 3,477,000
A new retail store has offered to buy 18,000 of its skateboards for $52 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. 30 percent of overhead is fixed at any production level from 82,000 units to 100,000 units; the remaining 70% 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 $3 per unit selling expense for this order. Administrative expenses would increase by a $990 fixed amount. Required: 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.
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