Problem 10-2A Analysis of income effects of additional business LO P1, A1

Calla Company produces skateboards that sell for $50 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,000 skateboards per year. Annual costs for 80,000 skateboards follow.

Direct materials	$	800,000
Direct labor		640,000
Overhead		960,000
Selling expenses		560,000
Administrative expenses		480,000
Total costs and expenses	$	3,440,000

A new retail store has offered to buy 10,000 of its skateboards for $45 per unit. The store is in a different market from Callas 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.
		Thirty percent of overhead is fixed at any production level from 80,000 units to 90,000 units; the remaining 70% of annual overhead costs are variable with respect to volume.
		Selling expenses are 60% variable with respect to number of units sold, and the other 40% of selling expenses are fixed.
		There will be an additional $2 per unit selling expense for this order.
		Administrative expenses would increase by a $1,000 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.