Question

In: Accounting

Calla Company produces skateboards that sell for $50 per unit. The company currently has the capacity...

Calla Company produces skateboards that sell for $50 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,000 skateboards per year. Annual costs for 80,000 skateboards follow.

Direct materials $ 800,000
Direct labor 640,000
Overhead 960,000
Selling expenses 560,000
Administrative expenses 480,000
Total costs and expenses $ 3,440,000


A new retail store has offered to buy 10,000 of its skateboards for $45 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.

Thirty percent of overhead is fixed at any production level from 80,000 units to 90,000 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 per unit selling expense for this order.

Administrative expenses would increase by a $1,000 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.

Solutions

Expert Solution

  • All workings forms part of the answer
  • Working for Variable cost, Variable cost per unit and Fixed Cost:

TOTAL

Variable part

Variable cost per unit, based on 80,000 units

Fixed part

[A]

[B = A x % given in question for variable portion]

[C = B / 80,000 units]

[D = A – B]

Direct Material

$                           800,000.00

$             800,000.00

$                             10.00

$                                       -  

Direct Labor

$                           640,000.00

$             640,000.00

$                                8.00

$                                       -  

Overheads

$                           960,000.00

$             672,000.00

$                                8.40

$                     288,000.00

Selling expenses

$                           560,000.00

$             336,000.00

$                                4.20

$                     224,000.00

Administrative expense

$                           480,000.00

$                              -  

$                                    -  

$                     480,000.00

TOTAL

$                       3,440,000.00

$                             30.60

$                     992,000.00

  • Requirement solved, as asked:

Annual Income without Special Order

Annual Income from Special Order

Combined Annual Income

Units

                                      80,000

                        10,000

                              90,000

Total Sales Revenue

$                       4,000,000.00

$             450,000.00

$               4,450,000.00

Variable costs:

Direct Material

$                           800,000.00

$             100,000.00

$                   900,000.00

Direct Labor

$                           640,000.00

$               80,000.00

$                   720,000.00

Overheads

$                           672,000.00

$               84,000.00

$                   756,000.00

Selling expenses

$                           336,000.00

$               62,000.00

$                   398,000.00

Total Variable cost

$                       2,448,000.00

$             326,000.00

$               2,774,000.00

Contribution margin

$                       1,552,000.00

$             124,000.00

$               1,676,000.00

Fixed Costs:

Overheads

$                           288,000.00

$                              -  

$                   288,000.00

Selling expenses

$                           224,000.00

$                              -  

$                   224,000.00

Administrative expense

$                           480,000.00

$                 1,000.00

$                   481,000.00

Total Fixed cost

$                           992,000.00

$                 1,000.00

$                   993,000.00

Net Income

$                           560,000.00

$             123,000.00

$                   683,000.00

  • Working for above figures:

Annual Income without Special Order

Annual Income from Special Order

Units

80000

10000

Total Sales Revenue

=80000*50

=10000*45

Variable costs:

Direct Material

=80000*10

=10000*10

Direct Labor

=80000*8

=10000*8

Overheads

=80000*8.4

=10000*8.4

Selling expenses

=80000*4.2

=(10000*(4.2+2))

Total Variable cost

Total Variable cost

Total Variable cost

Contribution margin

Sales – Variable cost

Sales – Variable cost

Fixed Costs:

Overheads

$                           288,000.00

0

Selling expenses

$                           224,000.00

0

Administrative expense

$                           480,000.00

$ 1000

Total Fixed cost

Total Fixed cost

Total Fixed cost

Net Income

Contribution margin – Fixed cost

Contribution margin – Fixed cost


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