Question

Calla Company produces skateboards that sell for $66 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 81,400 skateboards per year. Annual costs for 81,400 skateboards follow.

Direct materials	$	919,820
Direct labor		626,780
Overhead		958,000
Selling expenses		546,000
Administrative expenses		475,000
Total costs and expenses	$	3,525,600

A new retail store has offered to buy 13,600 of its skateboards for $61 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.

50 percent of overhead is fixed at any production level from 81,400 units to 95,000 units; the remaining 50% 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 $1.40 per unit selling expense for this order.

Administrative expenses would increase by a $840 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. (Do not round your intermediate calculations. Round your cost and expenses to nearest whole number.)

Answer 1

Solution

Calla Company

Three – Column Comparative Income Statement with

A – annual income without special order

B – Annual income with special order

C – Combined annual income from normal business and the new business

	Calla Company
	Comparative Income Statement
	Annual Income Without Special Order	Annual Income With Special Oder	Combined Income
Sales units	81,400	13,600	95,000
Sales Value	5,372,400	$829,600	$6,202,000
Costs and Expenses:
Direct material	$919,820	$153,680	$1,073,500
Direct Labor	$626,780	$104,720	$731,500
Overhead	$958,000	$80,029	$1,038,029
Selling expenses	$546,000	$92,019	$638,019
Administrative expense	$475,000	$840	$475,840
Total Costs and Expenses	$3,525,600	$431,288	$3,956,888
Operating Income	$1,846,800	$398,312	$2,245,112

1. Direct material cost per unit = $919,820/81,400 = $11.30
2. Direct labor cost per unit = $626,780/81,400 = $7.70
3. Overhead

• Fixed = 50% of 958,000 = $479,000
• Variable = 50% of 958,000 = $479,000
• Variable per unit = $479,000/81,400 = $5.88
• Variable for 13,600 units = $5.88 x 13,600 = $80,029

1. Selling expenses –

• Variable = 80% of 546,000 = $436,800
• Variable per unit = 436,800/81,400 = $5.37
• Add: additional selling cost per unit for special order = $1.40
• Selling expenses for special order = 13,600 x (5.37 + 1.40) = $92,019