Calla Company produces skateboards that sell for $64 per unit. The company curre

Question

Calla Company produces skateboards that sell for $64 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 81,500 skateboards per year. Annual costs for 81,500 skateboards follow. Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses 920,950 627,550 954,000 549,000 471,000 $3,522,500 A new retail store has offered to buy 13,500 of its skateboards for $59 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 · 50 percent of overhead is fixed at any production level from 81,500 units to 95,000 units, the remaining 50% 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 $1.30 per unit selling expense for this order. . Administrative expenses would increase by a $880 fixed amount.

Explanation / Answer

CALLA COMPANY COMPARATIVE INCOME STATEMENTS Normal Volume Additional Volume Combined Total Sales 5216000 796500 6012500 Costs and expenses: Direct materials 920,950 152,550 1073500 Direct labor 627,550 103,950 731500 Overhead 954,000 79,012 1033012 Selling expenses 549,000 81,207 630207 Administrative expenses 471,000 880 471880 Total costs and expenses 3,522,500 417,599 3940099 Operating income 1693500 378901 2072401

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