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 2,200 of the US umbrellas at a price of $18 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 4.50 2.50 $19.00 $26.00 Total cost Regular sales price Required 1. Compute the incremental profit (or loss) from accepting the special order Profit (or Loss) 2. Should Mohave accept the special order? No Yes 3. Suppose that the special order had been to purchase 2,700 umbrellas for $15.00 each. Recompute the incremental profit (or loss) from accepting the special order under this scenario Profit (or Loss) 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 Special Order Price per Unit

Explanation / Answer

Per unit Total 2200 units Incremental revenue 18 39600 Incremental costs: Variable costs: Direct materials 8 17600 Direct labor 4 8800 Variable manufacturing overhead 4.5 9900 Total variable cost 16.5 36300 Incremental net operating income(loss) 3300 Profit increases by $3300 2 Yes 3 Per unit Total 2700 units Incremental revenue 15 40500 Incremental costs: Variable costs: Direct materials 8 21600 Direct labor 4 10800 Variable manufacturing overhead 4.5 12150 Total variable cost 16.5 44550 Incremental net operating income(loss) -4050 Profit decreases by $4050 4 Special order price = $26

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