In: Accounting
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.
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 |
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 |
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 |