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 3,100 of the US umbrellas at a price of $32 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	$	13.00
Direct labor		7.00
Variable manufacturing overhead		9.00
Fixed manufacturing overhead		2.50
Total cost	$	31.50
Regular sales price	$	40.00

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 3,600 umbrellas for $28.00 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.

Screen Shot 2021-04-06 at 8.12.08 PM.png

Screen Shot 2021-04-06 at 8.11.53 PM.png

Screen Shot 2021-04-06 at 8.11.11 PM.png

Screen Shot 2021-04-06 at 8.11.59 PM.png

Screen Shot 2021-04-06 at 8.12.04 PM.png

Answer 1

Requirement #1)
Incremental Revenue (3100 × $32.00)	$ 99,200
Incremental Variable Costs [3100 × ($13 + $7 +$9)]	$ 89,900
Incremental Profit	$ 9,300
Net income will increase by $9,300 if the order is accepted
Requirement #2) Yes, net income will increase by $9300 if the order is accepted
Requirement #3)
Incremental Revenue (3,600 × $28)	$ 100,800
Incremental Variable Costs [3,600 × ($13 + $7+$9)]	$104,400
Incremental Loss	$ -3,600
Total profit would decrease by $3600
Requirement #4)
Special-order sales price would be $31.00 if Mohave operates at full capacity. The contribution Margin and income generated by the units are the same at this price so that Mohave is indifferent as to where it sells the units.