Question

Calla Company produces skateboards that sell for $68 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 80,600 skateboards per year. Annual costs for 80,600 skateboards follow.

Direct materials	$	830,180
Direct labor		572,260
Overhead		941,000
Selling expenses		547,000
Administrative expenses		474,000
Total costs and expenses	$	3,364,440

A new retail store has offered to buy 14,400 of its skateboards for $63 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.
• 40 percent of overhead is fixed at any production level from 80,600 units to 95,000 units; the remaining 60% of annual overhead costs are variable with respect to volume.
• Selling expenses are 70% variable with respect to number of units sold, and the other 30% of selling expenses are fixed.
• There will be an additional $1.90 per unit selling expense for this order.
• Administrative expenses would increase by a $970 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.

2. Should Calla accept this order?

Answer 1

Sollution 1
	Three-column comparative income statement of Calla Company
	Particulars	Regular Sale (80600 Units)	New retail store has offered (14400 Units)	Combined of normal business and the new business.
	Details	Amount	Details	Amount
	Revenue	80600*$68	$5,480,800.00	(14400*63)	$907,200.00	$6,388,000.00
	Costs:
	Direct Material($830180/80600=10.30Per unit)	given	$830,180.00	14400*$10.30	$148,320.00	$978,500.00
	Direct Labor(572260/80600=7.10 per unit)	given	$572,260.00	14400*$7.10	$102,240.00	$674,500.00
	Variable Overhead(564600/80600=7.005 p.u	$941000*60%	$564,600.00	14400*$7.005	$100,872.00	$665,472.00
	Variable Selling Expenses(382900/80600=4.75p.u	$547000*70%	$382,900.00	14400*($4.75+$1.9)	$95,760.00	$478,660.00
	Fixed overhead	$941000*40%	$376,400.00	no change	$0.00	$376,400.00
	Fixed Selling and administrative Expense	$547000*30%	$164,100.00	no change	$0.00	$164,100.00
	Administrative expenses	given	$474,000.00	additional	$970.00	$474970
	Income / (Loss)		$2,116,360.00		$459038.00	$2,575,398.00

Sollution 2

Calla accept this order because a incremental revenue of $459038