Calla Company produces skateboards that sell for $57 per unit. The company curre

Question

Calla Company produces skateboards that sell for $57 per unit. The company currently has the capacity to produce 100,000 skateboards per year, but is selling 82,000 skateboards per year. Annual costs for 82,000 skateboards follow.

Direct materials $ 893,800

Direct labor 623,200

Overhead 943,000

Selling expenses 551,000

Administrative expenses 466,000

Total costs and expenses $ 3,477,000

A new retail store has offered to buy 18,000 of its skateboards for $52 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. • 30 percent of overhead is fixed at any production level from 82,000 units to 100,000 units; the remaining 70% of annual overhead costs are variable with respect to volume. • Selling expenses are 80% variable with respect to number of units sold, and the other 20% of selling expenses are fixed. • There will be an additional $3 per unit selling expense for this order. • Administrative expenses would increase by a $990 fixed amount. Required: 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.

Explanation / Answer

Annual income without the special order Annual income from the special order Combined annual income from normal business and the new business Sales (82000*57) $ 46,74,000.00 (18000*52) $ 9,36,000.00 $ 56,10,000.00 Less: Variable cost of production direct material (82000*10.90) $ 8,93,800.00 (18000*10.90) $ 1,96,200.00 $ 10,90,000.00 Direct labour (82000*7.60) $ 6,23,200.00 (18000*7.60) $ 1,36,800.00 $    7,60,000.00 variable overhead 82000*8.05 $ 6,60,100.00 18000*8.05 $ 1,44,900.00 $    8,05,000.00 Variable selling Expense 82000 * 5.375 $ 4,40,800.00 18000*(5.375+3) $ 1,50,750.00 $    5,91,550.00 Total variable cost $ 26,17,900.00 $ 6,28,650.00 $ 32,46,550.00 Contribution Margin $ 20,56,100.00 $ 3,07,350.00 $ 23,63,450.00 Less: Fixed expenses Fixed overhead $ 2,82,900.00 $    2,82,900.00 Fixed selling expense $ 1,10,200.00 $    1,10,200.00 Administrative expense $ 4,66,000.00 $ 990.00 $    4,66,990.00 $    8,59,100.00 $ 990.00 $    8,60,090.00 Net profit $ 11,97,000.00 $ 3,06,360.00 $ 15,03,360.00 Variable Overhead Rate = ($943000x70%) / 82000 = $8.05 / skateboard Fixed Overhead Cost = 943000 x 30% = $282900 Variable selling overhead rate = $551000 x 80% = $440800 = $5.38 per skateboard Fixed selling expenses = 551000 * 20% = $110200 Administrative overhead is fixed Direct material cost per skateboard = $893800 / 82000 = $10.90 Direct labour cost per unit = $623200 / 82000 = $7.60

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