Mohave Corp. makes several varieties of beach umbrellas and accessories. It has

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 3,400 of the US umbrellas at a price of $35 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:   

Mohave Corp. makes several vaneties or beach umbrellas and accessones. It has been approached by a company called Lost Mine Industnes about producing a special order tor 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 ottered to buy 3,400 ot the US umbrellas at a price of $35 each. Mohave currently has the excess capacity necessary to accept the otter. The tollowing intormation is related to the production ot the US umbrella: 514.00 8.00 10.50 2.50 Direct materials Direct labor ariable manufacturing overhead Fixed manufacturing ovehead Total cost Regular sales price S43.00 Required: 1. Compute the incremental proft (or loss) trom accepting the special order by 2. Should Mohave accept the special order? C) No 3. Suppose that the special order had been to purchase 3,900 umbrellas for $32.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario t (or L by

Explanation / Answer

Req 1: Incremental analysis: Incremental revenue (3400*35) 119000 Less: Incremental cost Material (3400*14) 47600 Labor (3400*8) 27200 Variable OH (3400*10.50) 35700 Incremental Profits 8500 Profit increased by $ 8500 Yes, the order must be accepted Req 3: Incremental analysis: Incremental revenue (3900*32) 124800 Less: Incremental cost Material (3900*14) 54600 Labor (3900*8) 31200 Variable OH (3900*10.50) 40950 Incremental loss -1950 Loss increased by $ 1950 Req 4: Special order price is $ 43. As there is no excess capacity, there will be a loss of contribution for regular customer by 10.50 per unit (43-22.50) Therefore, the price for special order must be of $ 43 (32.50+10.50)

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