Mohave Corp. makes several varieties of beach umbrellas and accessories. It has
ID: 2531181 • Letter: M
Question
Mohave Corp. makes several varieties of beach umbrellas and accessories. It has been approached by a company called Lost Mine Industries about producing a special order for a custom umbrella called the Ultimate Shade (US). The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine.
Lost Mine has offered to buy 2,000 of the US umbrellas at a price of $16 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:
1. Compute the incremental profit (or loss) from accepting the special order.
2. Should Mohave accept the special order?
3. Suppose that the special order had been to purchase 2,500 umbrellas for $12.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario.
4. Assume that Mohave is operating at full capacity. Calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order.
Explanation / Answer
1.
Relavent costs = Direct materials + Direct labour + Variable manufacturing overhead
= 7 + 3 + 3.5
= 13.5
Special oreder price = 16
Incremental profit per unit = Special order price per unit - Relavent costs per unit
= 16 - 13.5
= 2.5
Incremental profit = 2,000 units * 2.5 per unit = 5,000
2.
Yes (as there is additional profit from the special order)
3.
Relavent costs = Direct materials + Direct labour + Variable manufacturing overhead
= 7 + 3 + 3.5
= 13.5
Special oreder price = 12
Incremental loss per unit = Relavent costs per unit - Special order price per unit
= 13.5 - 12
= 1.5
Incremental loss = 2,000 units * 1.5 per unit = 3,000
4.
When operating at full capacity, at regular selling price Mohave would be indifferent between accepting or rejecting the special order.
Special order price per unit = 24.
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