Calla Company produces skateboards that sell for $69 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 80,100 skateboards per year. Annual costs for 80,100 skateboards follow. Direct materials $ 937,170 Direct labor 680,850 Overhead 959,000 Selling expenses 549,000 Administrative expenses 475,000 Total costs and expenses $ 3,601,020 A new retail store has offered to buy 14,900 of its skateboards for $64 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 80,100 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 $2.90 per unit selling expense for this order. Administrative expenses would increase by a $810 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?

direct materials = ($937,170 / 80,100 units) x 14,900 = $174,330
direct labor = ($680,850 / 80,100 units) x 14,900 = $126,650
overhead = ($575,400 / 80,100 units) x 14,900 = $107,034
selling expenses = [($329,400 / 80,100 units) x 14,900] + ($2.90 x 14,900) = $74,952 + $48,330 = $104,484
administrative expenses = $810
total relevant costs = $513,308

gain from special order = $953,600 - $513,308 = $440,292

C) Income statement with the special order

total revenue = $6,480,500

- COGS = ($2,985,034)

Direct materials $1,111,500
Direct labor $807,500
Overhead $1,066,034

gross profit = $3,495,466

- SG&A = ($1,129,294)

Selling exp. $653,484
Administrative exp. $475,810

net income = $2,366,172

anthougo anthougo · Answer 2 · 2020-05-11T08:08:33+02:00

Answer:

Calla Company:

1. Comparative Income Statement:

This is attached.

a) Sales:

i) Normal = $69 * 80,100 = $5,526,900

ii) Special order = $64 * 14,900 = $953,600

iii) Combined = $6,480,500

b) Direct Materials Cost:

i) Normal = $937,170

ii) Special order = $174,330 ($937170/80,100 x 14,900)

iii) Combined = $1,111,500

c) Direct Labour Cost:

i) Normal = $680,850

ii) Special = $126,650 ($680,850/80,100 x 14,900)

iii) Combined = $807,500

d) Overhead Costs:

i) Normal - $959,000

ii) Special = $107,034 ((60% of $959,000)/80,100 x 14,900)

iii) Combined = $1,066,034

e) Selling Expenses:

i) Normal = $549,000

ii) Special = $61,274 (60% of $549,000)/80,100 x 14,900)

iii) Combined = $610,274

f) Administrative:

i) Normal = $475,000

ii) Special = $810

iii) Combined = $475,810

2. Advise:

Calla should accept this order. Income would increase by more than $400,000.

Explanation:

This is "an accept or reject" special order type of decision. To compute costs, only relevant costs, which will vary with the special order, are considered. Sunk costs, which do not make a difference, are not taken into account in arriving at the income for the special order.

This analysis is also called Incremental Analysis or Differential Analysis. It helps management to make a decision of whether to accept the special order or not. It is an important technique in managerial accounting.