Kava Inc. manufactures industrial components. One of its products, which is used in the construction of

industrial air conditioners, is known as K65. Data concerning this product are given below:

                                                                                   Per unit

Selling price..............................................................$180

Direct materials..........................................................$29

Direct labor...................................................................$5

Variable manufacturing overhead.................................$4

Fixed manufacturing overhead...................................$21

Variable selling expense...............................................$2

Fixed selling and administrative expense...................$17

The above per unit data are based on annual production of 4,000 units of the component. Direct labor can be considered a variable cost.

1. Prepare a contribution margin format income statement based on the annual

information above.

2.The company has received a special, one-time-only order for 500 units of component

K75, a modified version of component K65, that would be purchased at reduced price of $100 per unit. There would be no variable selling expense for this special order, but they would incur a rental expense of $15,000 for a special machine, as well as the additional expenses listed below.

                                                                                                Per unit

Additional direct materials........................................... $5

Additional direct labor..................................................  $1

Additional variable manufacturing overhead........... $0.75

Assuming that Kava has excess capacity and can fill the order without cutting back on the

production of any product, should this order be accepted? Please provide supporting calculations.

3. Now assume that Kava has no excess capacity and this special order would require

using a constrained resource, which could be used instead to produce products with a total

contribution margin of $11,000. What is the minimum price per unit on the special order below which the company should not go?