Calla Company produces skateboards that sell for $65 per unit. The company currently has the capacity to produce 90,000

Question

Calla Company produces skateboards that sell for $65 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 80,400 skateboards per year. Annual costs for 80,400 skateboards follow. A new retail store has offered to buy 9,600 of its skateboards for $60 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 80,400 units to 90,000 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 $2.8 per unit selling expense for this order. • Administrative expenses would increase by a $970 fixed amount.

Help In Homework · Accepted Answer

Answer: Normal Volume Additional Volume Combined Total Sales 5,226,000 576,000 5,802,000 Costs and expense:- Direct material 964,800 115,200 1,080,000 Direct labour 707,520 84,480 792,000 Overhead 950,000 68,060* 1,018,060 Selling Expenses 551,000 66,355 617,355 Administrative expenses 462,000 970 462,970 Total cost and expenses 3,635,320 335,065 3,970,385 Operating Income 1,590,680 240,935 1,831,615 *Overhead of 9,600 units = Total overhead* Variable overhead %/total no. current units*Additional units = $950,000*60%*9,600 units/80,400 units = $68,060 ** Selling expenses for 9600 units= Total selling expenses*Variable expenses%*9600 units/80,400 units + Additional selling expenses per unit*9,600 units = $551,000*60%*9,600/80,400 + $2.80*9,600 units = $66,355

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 calculation round your cost and expenses values to nearest whole decimal places.)

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Calla Company produces skateboards that sell for $65 per unit

Expert Solution

Archived Solution

•		Direct materials and direct labor are 100% variable.
•		40 percent of overhead is fixed at any production level from 80,400 units to 90,000 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 $2.8 per unit selling expense for this order.
•		Administrative expenses would increase by a $970 fixed amount.

	Normal Volume	Additional Volume	Combined Total
Sales	5,226,000	576,000	5,802,000
Costs and expense:-
Direct material	964,800	115,200	1,080,000
Direct labour	707,520	84,480	792,000
Overhead	950,000	68,060*	1,018,060
Selling Expenses	551,000	66,355	617,355
Administrative expenses	462,000	970	462,970
Total cost and expenses	3,635,320	335,065	3,970,385
Operating Income	1,590,680	240,935	1,831,615