Mohave Corp. makes several varieties of beach umbrellas and accessories. It has

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 3,500 of the US umbrellas at a price of $36 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:   

Required:
1. Compute the incremental profit (or loss) from accepting the special order.

3. Suppose that the special order had been to purchase 4,000 umbrellas for $33.00 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.

Direct materials $ 15.00 Direct labor 8.00 Variable manufacturing overhead 11.00 Fixed manufacturing overhead 2.50 Total cost $ 36.50 Regular sales price $ 44.00

Explanation / Answer

Note: Fixed manufacturing overheads are not considered since they remain unaffected by the acceptance or rejection of the special order since Mohave has unutilized capacity and are hence irrelevant.

4. Assuming Mohave is operating at full capacity, the special order price per unit at which Mohave would be indifferent between accepting or rejecting the special order would be $36.50 as the price per unit would include the variable costs of $34 and the fixed manufacturing costs of $2.50 per unit.

1 Selling price per unit $ 36 Variable costs: Direct materials 15 Direct labor 8 Variable manufacturing overhead 11 Total variable costs 34 Contribution per unit $ 2 Number of units ordered 3500 Incremental profit from accepting the special order $ 7000

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