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 1,900 of the US umbrellas at a price of S15 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Total cost Regular sales price $ 7.00 3.00 3.00 2.50 $15.50 $23.00 Required: 1. Compute the incremental profit (or loss) from accepting the special order. Profit (or Loss) Toby 2. Should Mohave accept the special order? Ο Νο Yes 3. Suppose that the special order had been to purchase 2,400 umbrellas for $10.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario. Profit (or Loss) by 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. Special Order Price per Unit

Answer 1

Solution 1:

Computation of incremental profit from special order
Particulars	Amount
Sales revenue	$28,500.00
Relevant costs:
Direct materials	$13,300.00
Direct labor	$5,700.00
Variable manufacturing overhead	$5,700.00
Incremental profit	$3,800.00

Solution 2:

Yes, Mohave should accept the special order.

Solution 3:

Computation of incremental profit from special order
Particulars	Amount
Sales revenue	$24,000.00
Relevant costs:
Direct materials	$16,800.00
Direct labor	$7,200.00
Variable manufacturing overhead	$7,200.00
Incremental profit (Loss)	-$7,200.00

Solution 4:

Special order price per unit at which mohave would be indifferent in accepting and rejecting the special order = Regular selling price per unit = $23 per unit