Define and identify relevant costs and benefits: Mohave Corp. makes several vari

Question

Define and identify relevant costs and benefits:

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 2,100 of the US umbrellas at a price of $17 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 $8.00 4.00 4.00 2.50 Total cost $18.50 Regular sales price $25.00 Required: 1. Compute the incremental profit (or loss) from accepting the special order Profit (or Loss) by

Explanation / Answer

Answer 1 )

Incremental Revenue (2100*17)= $35700

Incremental Cost (8+4+4)*2100= $ 33600

Incremental Profit = 35700-33600 = $ 2100

Answer 2)

As there is an incremental profit of $2100 thus Mohave should accept the special order.

Answer 3)

Now when 2600 umbrellas at the rate of $15

There is incremental loss

Incremental Revenue (2600*15) = $ 39000

Incremental Costs (2600*16)= $ 41600

Incremental Loss = 39000-41600 = $2600

Answer 4)

Special order price per unit = $ 25 Because this is the regular sales price.

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