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 81,500 skateboards per year. Annual costs for 81,500 skateboards follow.

Direct materials	$	929,100
Direct labor		741,650
Overhead		943,000
Selling expenses		554,000
Administrative expenses		474,000
Total costs and expenses	$	3,641,750

A new retail store has offered to buy 13,500 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.
• 50 percent of overhead is fixed at any production level from 81,500 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 $2.30 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

CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
	Normal Volume	Additional Volume	Combined Total
Sales	5,542,000	850,500	6,392,500
Costs and expenses:
Direct materials	929,100	153,900	1,083,000
Direct labor	741,650	122,850	864,500
Overhead	943,000	78,101	1,021,101
Selling expenses	554,000	104,463	658,463
Administrative expenses	474,000	970	474,970
Total costs and expenses	3,641,750	460,285	4,102,035
Operating income	1,900,250	390,215	2,290,465
Yes accept offer