MGMT 312,


Module 8 Review Questions

Analysis of income effects of additional business
Calla Company produces skateboards that sell for $50 per unit. The company
currently has the capacity to produce 90,000 skateboards per year, but is selling
80,000 skateboards per year. Annual costs for 80,000 skateboards follow.

A new retail store has offered to buy 10,000 of its skateboards for $45 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:
Direct materials and direct labor are 100% variable.
Thirty percent of overhead is fixed at any production level from 80,000
units to 90,000 units; the remaining 70% of annual overhead costs are
variable with respect to volume.
Selling expenses are 60% variable with respect to number of units sold,
and the other 40% of selling expenses are fixed.
There will be an additional $2 per unit selling expense for this order.
Administrative expenses would increase by a $1,000 fixed amount.
1. Prepare a three-column comparative income statement that reports the
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.
2. Should Calla accept the order? What nonfinancial factors should Calla
consider? Explain.
3. Assume that the new customer wants to buy 15,000 units instead of 10,000
units. It will only buy 15,000 units or none and will not take a partial order.
Without any computations, how does this change your answer to part 2?

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