Calla Company produces skateboards that sell for $61 per unit. The company curre

Question

Calla Company produces skateboards that sell for $61 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 81,800 skateboards per year. Annual costs for 81,800 skateboards follow.

A new retail store has offered to buy 8,200 of its skateboards for $56 per unit. The store is in a different market from Calla's regular customers and it would not affect regular sales. A study of its costs in anticipation of this additional business reveals the following:

40 percent of overhead is fixed at any production level from 81,800 units to 90,000 units; the remaining 60% 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.

  Direct materials $ 883,440   Direct labor 744,380   Overhead 956,000   Selling expenses 544,000   Administrative expenses 477,000     Total costs and expenses $ 3,604,820  

Explanation / Answer

Hi,

Please find the answer as follows:

Normal Volume New Business Combined Sales (81800*61) 4989800 459200 5449000 Costs and expenses


Direct Materials 883440 88560 972000 Direct labor 744380 74620 819000 Overhead 956000 57500 1013500 Selling expenses 544000 38173 582173 Administrative expenses 477000 800 477800 Total costs and expenses 3604820 259653 3864473 Operating Income 1384980 199547 1584527

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