Question

PA7-1 (Algo) Analyzing Special-Order Decision (LO 7-2, 7-3] 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 2,000 of the US umbrellas at a price of $16 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 3.50 2.50 $ 16.00 $24.00 Required: 1. Compute the incremental profit (or loss) from accepting the special order. 2. Should Mohave accept the special order? 3. Suppose that the special order had been to purchase 2,500 umbrellas for $12.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario. 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Compute the incremental profit (or loss) from accepting the special order. Profit (or Loss) by Required 1 Required 2 >

Answer 1

1
	Per unit	Total 2000 units
Incremental revenue	16.00	32000
Incremental costs:
Direct materials	7.00	14000
Direct labor	3.00	6000
Variable manufacturing overhead	3.50	7000
Total Incremental costs		27000
Incremental net operating income(loss)		5000
Profit(or loss) increases by 5000
2
Yes, accept the special order
3
	Per unit	Total 2500 units
Incremental revenue	12.00	30000
Incremental costs:
Direct materials	7.00	17500
Direct labor	3.00	7500
Variable manufacturing overhead	3.50	8750
Total Incremental costs		33750
Incremental net operating income(loss)		-3750
Profit(or loss) decreases by 3750
4
Special order price will be regular sale price
Special order price	24	per unit