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 95,000 skateboards per year, but is selling 81,800 skateboards per year. Annual costs for 81,800 skateboards follow Direct materials Direct labor Overhead Selling expenses Administrative expenses Total costs and expenses S 899,800 711,660 941,000 554,000 473,000 $3,579,460 A new retail store has offered to buy 13,200 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 ·50 percent of overhead is fixed at any production level from 81,800 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 $2.10 per unit selling expense for this order Administrative expenses would increase by a $880 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. (Do not round your intermediate calculations. Round your cost and expenses to nearest whole number.)

Explanation / Answer

Please note in calculating the costs of additional units in pro rata manner, only Variance costs /additional costs have been considered.As fixed costs do not affect the decision making, they have not been considered.

For additional units:

Direct Material: 899800*13200/81800

Direct Labour: 711660*13200/81800

Overheads - Variable (50%): 470500*13200/81800

Selling Expenses: 554000*70%*13200/81800

Admn Exp: 880(additional)

II. Cost of making the product:

Material: 4

Labour: 8

Overhead-Variable component: 9*20%=1.8

Total cost=$13.8

Cost of buying=$19

Advantage in making= $5.2/- per unit

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Normal Additional Combined Sales 4662600 686400 5349000 Less: Costs Direct Material 899800 145200 1045000 Direct Labour 711660 114840 826500 Overheads 941000 75924 1016924 Selling Exp 554000 62579 616579 Admin Exp 473000 880 473880 Income 1083140 286977 1370117

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