Question

Calla Company produces skateboards that sell for $64 per unit. The company currently has the capacity to produce 100,000 skateboards per year, but is selling 80,200 skateboards per year. Annual costs for 80,200 skateboards follow. Direct materials $ 930,320 Direct labor 729,820 Overhead 949,000 Selling expenses 543,000 Administrative expenses 462,000 Total costs and expenses $ 3,614,140 A new retail store has offered to buy 19,800 of its skateboards for $59 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 80,200 units to 100,000 units; the remaining 70% 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 $2.40 per unit selling expense for this order. Administrative expenses would increase by a $880 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.

Answer 1

Comparative income statement
	without the special order	special order	Working-Special	Combined
Sales	5,132,800	1,168,200	(19,800 x 59 )	6,301,000
Costs & Expenses:
Direct Materials	930,320	229,680	(930,320/80,200 ) x 19,800	1,160,000
Direct Labour	729,820	180,180	(729,820/80,200 ) x 19,800	910,000
Overhead	949,000	164,004	((949,000 x 70% ) / 80,200) x 19,800	1,113,004
Selling Expenses	543,000	80,434	((543,000 x 60% ) / 80,200) x 19,800	623,434
Additional Selling Expenses	-	47,520	(19,800 x 2.40 )	47,520
Administrative Expenses	462,000	880		462,880
Total Costs & Expenses:	3,614,140	702,699		4,316,839
Annual Income	1,518,660	465,501		1,984,161