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Homework answers / question archive / Calla Company produces skateboards that sell for $68 per unit

Calla Company produces skateboards that sell for $68 per unit

Accounting

Calla Company produces skateboards that sell for $68 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 81,600 skateboards per year. Annual costs for 81,600 skateboards follow.

       
Direct materials $ 848,640  
Direct labor   693,600  
Overhead   951,000  
Selling expenses   549,000  
Administrative expenses   472,000  
Total costs and expenses $ 3,514,240  
 


A new retail store has offered to buy 13,400 of its skateboards for $63 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 81,600 units to 95,000 units; the remaining 60% 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 $2.90 per unit selling expense for this order.
  • Administrative expenses would increase by a $930 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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Answer to Question 1:

   Calla Company

Comparative Income Statement

Particulars Normal Volume Additional Volume Combined Total
Sales ($68 * 81,600) (A) 5,548,800 844,200 6,393,000
Costs and expenses:      
Direct materials 848,640 139,360 988,000
Direct labor 693,600 113,900 807,500
Overhead 951,000 93,701 1,044,701
Selling expenses 549,000 101,968 650,968
Administrative expenses 472,000 930 472,930
Total costs and expenses (B) 3,514,240 449,859 3,964,099
Operating income [(A) - (B)] 2,034,560 394,341 2,428,901

Workings:

  Additional volume:
Sales (13,400 * $ 63 per unit) 844,200
Cost and Expenses:  
Direct Materials [($848,640/81,600) * 13,400] 139,360
Direct Labor [($693,600/81,600) * 13,400] 113,900
Overhead [($951,000 * 60%)/81,600 * 13,400] 93,701
Selling Expenses [($549,000 * 70%)/81,600 * 13400] + (13,400 * $2.90) 101,968

Answer to (2):

Yes, Calla should accept this order.

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