Calla Company produces skateboards that sell for $55 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 81,800 skateboards per year. Annual costs for 81,800 skateboards follow. Direct materials $ 948,880 Direct labor 597,140 Overhead 952,000 Selling expenses 542,000 Administrative expenses 480,000 Total costs and expenses $ 3,520,020 A new retail store has offered to buy 13,200 of its skateboards for $50 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. 40 percent of overhead is fixed at any production level from 81,800 units to 95,000 units; the remaining 60% 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 $2.00 per unit selling expense for this order. Administrative expenses would increase by a $910 fixed amount. Required: 1. 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. 2. Should Calla accept this order?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter18: Pricing And Profitability Analysis

Section: Chapter Questions

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Calla Company produces skateboards that sell for $55 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 81,800 skateboards per year. Annual costs for 81,800 skateboards follow.


Direct materials	$	948,880
Direct labor		597,140
Overhead		952,000
Selling expenses		542,000
Administrative expenses		480,000
Total costs and expenses	$	3,520,020

A new retail store has offered to buy 13,200 of its skateboards for $50 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.
40 percent of overhead is fixed at any production level from 81,800 units to 95,000 units; the remaining 60% 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 $2.00 per unit selling expense for this order.
Administrative expenses would increase by a $910 fixed amount.

Required:
1. 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.

2. Should Calla accept this order?

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