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 2.500 of the US umbrellas at a price of $23 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 $1e.ee 5.ee 6.ee 2.50 $23.50 $31.00 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 3,000 umbrellas for $20.00 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.

Answer 1

1) Compute the incremental profit (or loss) from accepting the special order.
Incremental Revenue (2,500 × $23.00)	$ 57,500.00
Incremental Variable Costs [2,500 × ($10 + $5 +$6)]	$ 52,500.00
Incremental Profit	$ 5,000.00
Net income will increase by $5000 if the order is accepted
2) Yes, net income will increase by $5000 if the order is accepted
3)
Incremental Revenue (3,000 × $20)	$ 60,000.00
Incremental Variable Costs [3,000 × ($10 + $5 +$6)]	$ 63,000.00
Incremental Loss	$ -3,000.00
Total profit would decrease by $3,000
4)
If Mohave was at full capacity, then the special-order sales price would have to be $31.00. At that price, Mohave is indifferent as to where it sells the units because the CM and income generated by the units is the same.