Calla Company produces skateboards that sell for 64 per unit

Calla Company produces skateboards that sell for $64 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 81,100 skateboards per year. Annual costs for 81,100 skateboards follow. Direct materials Direct labor Overhead Selling expenses Administrative expenses 843,440 656,910 946,000 556,000 469,000 3,471,350 Total coats and expenses A new retail store has offered to buy 8,900 of its skateboards for $59 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. ·30 percent of overhead is fixed at any production level from 81,100 units to 90,000 units; the remaining 70% 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 $1.10 per unit selling expense for this order Administrative expenses would increase by a $1,000 fixed amount.

Solution

calla company

comparative income statements

	NOrmal volume	Additional volume	COmbined total
sales revenue (81,100*64) (8,900*59)	$5,190,400	$525,100	$5,715,500
Costs and expenses:
Direct materials (843,440/81,100 * 8900)	843,440	92,560	936,000
Direct labour (656,910/81,100 * 8900)	656,910	72,090	729,000
fixed overhead (70%*943,600=>662,200 / 81,100*8,900 =>72,671)	946,000	72,671	1,018,671
selling expenses (556,000*70% =>389,200/81,100 * 8900)=>42,711 + (1.10*8900) =>42,711 + 9790	556,000	52,501	608,501
administrative expenses	469,000	1,000	470,000
total cost and expenses	$3,471,350	$291,122	$3,762.472
operating income	$1,719,050	$233,978	1,953,028