In: Accounting
Calla Company produces skateboards that sell for $69 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
$
943,020
Direct labor
604,500
Overhead
951,000
Selling expenses
551,000
Administrative expenses
475,000
Total costs and expenses
$
3,524,520
A new retail store has offered to buy 14,400 of its skateboards for
$64 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 60% variable with respect to number of units sold, and the other 40% of selling expenses are fixed.
There will be an additional $1.60 per unit selling expense for this order.
Administrative expenses would increase by a $910 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?
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Calla Company | |||||
Workings for fixed cost and variable cost per unit | Total | Fixed cost @40% | Variable cost @60% | Variable cost per unit | Note |
Units | 80,600.00 | ||||
Direct materials (100% variable) | 943,020.00 | 943,020.00 | 11.70 | This is Direct materials cost/ 80,600 Units. | |
Direct Labor (100% variable) | 604,500.00 | 604,500.00 | 7.50 | This is Direct Labor cost/ 80,600 Units. | |
Overhead | 951,000.00 | 380,400.00 | 570,600.00 | 7.08 | This is overhead costs/ 80,600 Units. |
Selling Expense | 551,000.00 | 220,400.00 | 330,600.00 | 4.1 | This is selling expense / 80,600 Units. |
Answer 1 | |||||
Without special order | Special order | With special order | |||
Total units | 80,600.00 | 14,400.00 | 95,000.00 | ||
Sales- Normal order (80600*69) | 5,561,400.00 | 5,561,400.00 | |||
Sales- Special order (14400*64) | 921,600.00 | 921,600.00 | |||
Less: Variable costs | |||||
Direct materials | 943,020.00 | 168,480.00 | 1,111,500.00 | This is Total units *11.70. | |
Direct Labor | 604,500.00 | 108,000.00 | 712,500.00 | This is Total units *7.50. | |
Overhead | 570,600.00 | 101,943.42 | 672,543.42 | This is Total units *7.08. | |
Selling Expense | 330,600.00 | 59,065.01 | 389,665.01 | This is Total units *4.10. | |
Additional Selling Expense | - | 23,040.00 | 23,040.00 | This is Total units *1.60. | |
Contribution margin | 3,112,680.00 | 461,071.56 | 3,573,751.56 | ||
Less: Fixed costs | |||||
Overhead | 380,400.00 | 380,400.00 | |||
Selling Expense | 220,400.00 | 220,400.00 | |||
Administrative expenses | 475,000.00 | 910.00 | 475,910.00 | ||
Net income | 2,036,880.00 | 460,161.56 | 2,497,041.56 | ||
Answer b | |||||
Call has positive incremental income of $ 460,161.56 by accepting the order so it should accept the offer. |