PA7-1 (Algo) Analyzing Special-Order Decision [LO 7-2, 7-3]

Mohave Corporation 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 offered to buy 1,800 US umbrellas at a price of $14 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	$ 6.00
Direct labor	3.00
Variable manufacturing overhead	2.50
Fixed manufacturing overhead	2.50
Total cost	$ 14.00
Regular sales price	$ 22.00

Required:

1. Compute the incremental profit (or loss) from accepting the special order.
2. Should Mohave accept the special order?
3. Suppose the special order had been to purchase 2,300 umbrellas for $9.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.
4. Assume 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.