Question

Cayman Products manufactures and sells to wholesalers approximately 300,000 packages per year of underwater markers at $3.96 per package. Annual costs for the production and sale of this quantity are shown in the table.

  

Direct materials	$	384,000
Direct labor		96,000
Overhead		288,000
Selling expenses		120,000
Administrative expenses		80,000
Total costs and expenses	$	968,000

  

A new wholesaler has offered to buy 50,000 packages for $3.43 each. These markers would be marketed under the wholesaler’s name and would not affect Cayman Products’ sales through its normal channels. A study of the costs of this additional business reveals the following:

  

•	Direct materials costs are 100% variable.
•	Per unit direct labor costs for the additional units would be 50% higher than normal because their production would require overtime pay at one-and-one-half times the usual labor rate.
•	25% of the normal annual overhead costs are fixed at any production level from 250,000 to 400,000 units. The remaining 75% of the annual overhead cost is variable with volume.
•	Accepting the new business would involve no additional selling expenses.
•	Accepting the new business would increase administrative expenses by a $4,000 fixed amount.

  

Required:

Complete the three-column comparative income statement that shows the following. (Do not round intermediate calculations and round your final answers to the nearest dollar amount. Input all amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response):

  

1.	Annual operating income without the special order.
2.	Annual operating income received from the new business only.
3.	Combined annual operating income from normal business and the new business.

CAYMAN PRODUCTS COMPARATIVE INCOME STATEMENTS
	(1) Normal Volume	(2) New Business	(3) Combined
(Click to select)Accounts receivableEquipmentSalesPurchase discountsAccounts payable	$	$	$
Costs and expenses
(Click to select)Cost of goods soldIndirect materialsBudgeted purchasesDirect materialsWages expense
(Click to select)Sales expenseIndirect laborCash discountsDepreciation expenseDirect labor
(Click to select)Cost of goods soldRepairs expenseAccumulated depreciationRent expenseOverhead
(Click to select)Repairs expenseCost of goods soldWages expenseSelling expensePurchase discounts
(Click to select)Indirect materialsWages expenseAdministrative expenseRent expenseCost of goods sold
Total costs & expenses
(Click to select)Operating incomeOperating loss	$	$	$

Answer 1

Computation of the three-column comparative income statement that shows annual operating income without the special order,annual operating income received from the new business only and combined annual operating income from normal business and the new business.We have,

Items	Normal Volume	New business	Combined
Sales in unit	300,000	50,000	350,000
x sales price per unit	$ 3.96	$ 3.43
Sales in doller	$ 1,188,000	$ 171,500	$ 1,359,500
Less: Variable expenses:
Direct material	$ 384,000	$ 64,000	$ 448,000
Direct labor	$ 96,000	$ 24,000	$ 120,000
Variable overhead(288,000 x 75%)	$ 216,000	$ 36,000	$ 252,000
Total variable expenses	$ 696,000	$ 124,000	$ 820,000
Contribution Margin	$ 492,000	$ 47,500	$ 539,500
Less: Fixed Expenses:
Fixed overhead(288,000 x 25%)	$ 72,000	0	$ 72,000
Selling Expenses	$ 120,000	0	$ 120,000
Administrative expenses	$ 80,000	$ 4,000	$ 84,000
Total Fixed Expenses	$ 272,000	$ 4,000	$ 276,000
Net operating profit	$ 220,000	$ 43,500	$ 263,500

Note1: Direct material per unit = 384,000 / 300,000 = $ 1.28

Direct material for 50,000 unit = 50,000 x 1.28 = $ 64,000

Note2: Direct labor per unit = 96,000 / 300,000 = $ 0.32

Direct labor for 50,000 units = 50,000 x 0.32(1 + 0.50)

Direct labor for 50,000 unit = 50,000 x 0.48 = $ 24,000

Note3: Variable overhead per unit = 216,000 / 300,000 = $ 0.72

Variable overhead per unit = 50,000 x 0.72 = $ 36,000

Note4: Fixed overhead is fixed for 400,000 units production.There are no fixed overhead cost for additional production.