Question

Calla Company produces skateboards that sell for $67 per unit. The company currently has the capacity to produce 95,000 skateboards per year, but is selling 81,800 skateboards per year. Annual costs for 81,800 skateboards follow. $ 965, 240 Direct materials Direct labor overhead Selling expenses Administrative expenses 621, 680 958, 000 545, 000 479,000 $3, 568, 920 Total costs and expenses A new retail store has offered to buy 13,200 of its skateboards for $62 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. • 40 percent of overhead is fixed at any production level from 81,800 units to 95,000 units; the remaining 60% 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 • There will be an additional $2.00 per unit selling expense for this order. • Administrative expenses would increase by a $820 fixed amount. are fixed. Required: Prepare a three-column comparative income statement that reports the following: a. Annuel income without the special order. b. Annual income from the special order. c. Combined annual income from normal business and the new business. (Do not round your Intermediate calculations. Round your cost and expenses to nearest whole number.)

Answer 1

1)

CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
	Normal Volume	Additional Volume	Combined Total
Sales	(81800*$67)= $5480600	(13200*$62)= $818400	(5480600+818400)= $6299000
Cost and expenses:
Direct materials	965240	155760	(965240+155760)= 1121000
Direct labor	621680	100320	(621680+100320)= 722000
Overhead	958000	92755	(958000+92755)= 1050755
Selling expenses	545000	79168	(545000+79168)= 624168
Administrative expenses	479000	820	(479000+820)= 479820
Total cost and expenses	$3568920	$428823	$3997743
Operating income	$1911680	$389577	$2301257

Calculation of Additional volume cost and expenses

Direct materials= $965240/81800*13200= $155760

Direct labor= $621680/81800*13200= $100320

Overhead= $958000*60%= 574800/81800*13200= $92755

Variable selling expense= $545000*60%= 327000/81800*13200= $52768

Additional selling expense= 13200*$2= $26400

Total selling expense= $52768+26400= $79168

2)

Total incremental costs of:	Making the units	Buying the units
Direct materials	(61000*$5)= $305000	-
Direct labor	(61000*$9)= 549000	-
Variable overhead	(61000*$10*20%)= 122000	-
Purchase price	-	(61000*$19)= 1159000
Total costs	$976000	$1159000
Should the company continue to manufacture the part or should it buy the part from the outside supplier?		Make the units

3)

	Keep the department	Eliminate the department
Sales	$2600000	$0
Expenses:
Direct materials	570000	0
Direct labor	620000	0
Variable overhead	420000	0
Variable selling and administrative costs	260000	0
Direct fixed costs	495000	0
Indirect fixed costs	420000	300000
Total expenses	2785000	300000
Net income (loss)	$(185000)	$(300000)
The canon division should be	Kept
If the management discontinue the canon division, net income will	decrease by	$115000 (300000-185000)

No, the management should not discontinue the canoes as the net income is decreasing if the management discontinue the canoes department

4)

Project C1
Initial Investment		$234000
Chart Values are based on:
i=	10%
Year	Cash inflow	*	PV Factor	=	Present Value
1	14000	*	0.90909	=	$12727
2	110000	*	0.82645	=	90910
3	170000	*	0.75131	=	127723
					$231360
Present value of cash inflows					$231360
Present value of cash outflows					-234000
Net present value					-2640
The company should acquire the investment?					No
Project C2
Initial Investment		$234000
Chart Values are based on:
i=
Year	Cash inflow	*	PV Factor	=	Present Value
1	98000	*	0.90909	=	$89091
2	98000	*	0.82645	=	80992
3	98000	*	0.75131	=	73628
					$243711
Present value of cash inflows					$243711
Present value of cash outflows					-234000
Net present value					$9711
The company should acquire the investment?					Yes
Project C3
Initial Investment		$234000
Chart Values are based on:
Year	Cash inflow	*	PV Factor	=	Present Vlaue
1	182000	*	0.90909	=	$165454
2	62000	*	0.82645	=	51240
3	50000	*	0.75131	=	37566
					$254260
Present value of cash inflows					$254260
Present value of cash outflows					-234000
Net present value					$20260
The company should acquire the investment?					Yes