Question

Calla Company produces skateboards that sell for $63 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,200 skateboards per year. Annual costs for 80,200 skateboards follow.

Direct materials	$	906,260
Direct labor		721,800
Overhead		956,000
Selling expenses		550,000
Administrative expenses		467,000
Total costs and expenses	$	3,601,060

A new retail store has offered to buy 9,800 of its skateboards for $58 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.
• 50 percent of overhead is fixed at any production level from 80,200 units to 90,000 units; the remaining 50% of annual overhead costs are variable with respect to volume.
• Selling expenses are 70% variable with respect to number of units sold, and the other 30% of selling expenses are fixed.
• There will be an additional $1.60 per unit selling expense for this order.
• Administrative expenses would increase by a $860 fixed amount.

Answer 1

Direct materials cost per unit = Direct materials costs / 80,200 units = $906,260 / 80,200 = $11.3

Direct labor cost per unit = Direct labor costs / 80,200 units = $721,800 / 80,200 = $9

Variable overhead cost = Overhead cost * 50% / 80,200 units = ($956,000 * 50%) / 80,200 = $5.96

Variable Selling expenses = Selling expenses * 70% / 80,200 = $4.8
Additional Selling expense = $1.6 per unit.

Additional administrative expenses = $860

Contribution from selling a skateboard to the new retail store = (Selling Price per unit - Variable costs per unit ) = $58 - $11.3 - $9 - $5.96 - $4.8 - $1.6 = $25.34

Contribution from 9,800 units = $25.34 * 9,800 = $248,332

Net advantage from selling to retail store = Contribution - Additional administrative expenses = $248,332 - $860 = $247,472.
Fixed costs are not considered as they are sunk cost which are irrelevant for decision making . They will continue to occur whether the company accepts a new offer or rejects.