Mohave Corp. makes several varieties of beach umbrellas and accessories. It has
ID: 2525418 • Letter: M
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 2,300 of the US umbrellas at a price of $19 each. Mohave currently has the excess capacity necessary to accept the offer. The following information is related to the production of the US umbrella:
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 2,800 umbrellas for $16.00 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.
Explanation / Answer
Per unit Total 2300 Incremental revenue 19 43700 Variable costs: Direct materials 9 20700 Direct labor 4 9200 Variable manufacturing overhead 5 11500 Total Incremental costs 41400 Incremental net operating income(loss) 2300 Profit increases by $2300 2 Yes 3 Per unit Total 2800 Incremental revenue 16 44800 Variable costs: Direct materials 9 25200 Direct labor 4 11200 Variable manufacturing overhead 5 14000 Total Incremental costs 50400 Incremental net operating income(loss) -5600 Profit decreases by $5600 4 Special Order Price $27 per unit
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