Question

Calla Company produces skateboards that sell for $54 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,300 skateboards per year. Annual costs for 80,300 skateboards follow.

Direct materials	$	963,600
Direct labor		674,520
Overhead		951,000
Selling expenses		552,000
Administrative expenses		467,000
Total costs and expenses	$	3,608,120

A new retail store has offered to buy 9,700 of its skateboards for $49 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 80,300 units to 90,000 units; the remaining 70% 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 $3.10 per unit selling expense for this order.
• Administrative expenses would increase by a $860 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. (Do not round your intermediate calculations. Round your cost and expenses to nearest whole number.)

Answer 1

Solution :

Particulars	Normal Volume	Additinal Volume	Combined Total
Sales	$ 4,336,200	$ 475,300	$ 4,811,500
Cost and Expenses :
Direct Material	$ 963,600	$ 116,400	$ 1,080,000
Direct Labor	$ 674,520	$ 81,480	$ 756,000
Overhead	$ 951,000	$ 80,415	$ 1,031,415
Selling Expenses	$ 552,000	$ 83,414	$ 635,414
Administrative Expenses	$ 467,000	$ 860	$ 467,860
Total Cost and Expenses	$ 3,608,120	$ 362,569	$ 3,970,689
Operating Income	$ 728,080	$ 112,731	$ 840,811

Working for Additional Volume :

Sales	9,700 * $ 49	$ 475,300
Direct Material	($ 963,600 / 80,300) * 9,700	$ 116,400
Direct Labor	($ 674,520 / 80,300) * 9,700	$ 81,480
Overhead	[($ 951,000 * 0.70) / 80,300 ] * 9,700	$ 80,415
Selling Expenses	[(552,000 * 0.80) / 80,300] * 9,700 + (9,700 * 3.10)	$ 83,414

Please vote up and write your doubts in comment section. Would be glad to help you further.