Question

9.

Calla Company produces skateboards that sell for $52 per unit. The company currently has the capacity to produce 100,000 skateboards per year, but is selling 81,300 skateboards per year. Annual costs for 81,300 skateboards follow.

Direct materials	$	967,470
Direct labor		642,270
Overhead		942,000
Selling expenses		557,000
Administrative expenses		471,000
Total costs and expenses	$	3,579,740

A new retail store has offered to buy 18,700 of its skateboards for $47 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 81,300 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 $2.80 per unit selling expense for this order.
• Administrative expenses would increase by a $960 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.

	CALLA COMPANY COMPARATIVE INCOME STATEMENTS Normal Volume Additional Volume Combined Total Costs and expenses: Total costs and expenses Operating income

2. Should Calla accept this order?

10. Cobe Company has already manufactured 20,000 units of Product A at a cost of $25 per unit. The 20,000 units can be sold at this stage for $450,000. Alternatively, the units can be further processed at a $270,000 total additional cost and be converted into 5,600 units of Product B and 11,900 units of Product C. Per unit selling price for Product B is $103 and for Product C is $53.

1. Prepare an analysis that shows whether the 20,000 units of Product A should be processed further or not?

	Sell as is Process Further Sales Relevant costs: Total relevant costs Income (loss) Incremental net income (or loss) if processed further The company should

Answer 1

Given Total Capacity 100,000 skateboards per year, Currently selling 81,300 skateboards per year.

CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
PARTICULARS	NORMAL VOLUME (81,300 skateboard)	ADDITIONAL VOLUME (18,700 skateboard)	COMBINED VOLUME (81300+18700)=100,000
Sales(A)	(81,300*$52)= $42,27,600	(18700*$47) =$878,900	$51,06,500
Less:Cost of goods sold
Direct materials	$967,470	$222,530	$11,90,000
Direct labour	$642,270	$108230	$750,500
Overhead	$942,000	151670	$10,93,670
Selling expenses	$557,000	(102493+52360) =1,54,853	$711853
Administrative expenses	$471,000	$960	$471960
Total costs and expenses (B)	$3,579,740	$6,38,243	$42,17,983
Operating income (A-B)	$647,860	2,40,657	$8,88,517

Calculation of Cost of good sold for special offer:

Cost of goods sold	NORMAL	SEGREGATION(Given)	SPECIAL OFFER(variable) (Cost/ normal units* special offer)	SPECIAL OFFER(Fixed)	Additional
Direct materials	$967,470	100% variable	$(967,470/81300 *18700) = 222,530
Direct labour	$642,270	100% variable	$(642,270/81300 *18700) = $108,230
Overhead	$942,000	30% fixed: 70% variable	$(659,400/81300 *18700) =151670	($282,600/81300 *18700)= 65001
Selling expenses	$557,000	20% fixed: 80% variable	$(445,600/81300 *18700) =102493	(111,40/81300 *18700)=25623	(18700*2.80) =52,360
Administrative expenses	$471,000		-	-	$960
Total costs and expenses (B)	$3,579,740		$5,87,923 (note 1)	$90624(Note 2)	53,320(Note 3)

Note 1: Variable cost are relevant cost as it change swith chnage in the production

Note 2: Fixed cost is not relevant cost as it does not change with change of production so it will not be added in special offer.

Note 3: Relevant as it is specifically incurred for the project.

DECISION: Calla company should accept the order as it generates additional income of $ 240,657

2)

(ALT 1) Given Product A- Sell as it at $450,000 ,Qty = 20,000 units which cost $25 per unit

(ALT 2) Given that  the units can be further processed at a $270,000 total additional cost and production of

(I) [Product B   5,600 units @$103=576,800 ],

(II)  [ Product C 11,900 units @$53 =630700]

Total Sales =(576,800+630,700)=$12,07,500

	Sell as it(ALT 1)	Processed Further(ALT 2)
Sales (A)	$450,000	$12,07,500
Relevant cost (B)	(20,000*$25) =$500,000	(20,000*$25) =$500,000
Additional cost (C)	-	$270,000
Total Relevant cost(Loss) D=(B+C)	($500,000)	$7,70,000
Income(Loss) (A-D)	($50,000)	$437,500
Incremental net income (or loss) if processed further	-	($437,500+50,00) =457,500
The company should	process further and then sell the product(ALT 2)

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