Financial and Managerial Accounting: Information for Decisions, Sixth Edition Ch

Question

Financial and Managerial Accounting: Information for Decisions, Sixth Edition Chapter 23 Relevant Costing for Managenial Decisions Required Prepare a three-column comparative income statement that reports the following: a. Annual income without the special order. b. Annual income from the special order. c. Combined annual income from normal business and the new business. 2. Should Calla accept this order? What nonfinancial factors should Calla consider? Explain. Analysis Component Assume that the new customer wants to buy 15,000 units instead of 10,000 000 units or none and will not take a partial order Without any comput your answer for part 2? units-it will only buy any computations, how does this change

Explanation / Answer

CALLA COMPANY

CALLA COMPANY

COMPARATIVE INCOME STATEMENTS Normal
Volume Additional
Volume Combined
Total Sales $4,000,000 $450,000 $4,450,000 Costs and expenses: Direct materials 800,000 100,000 900,000 Direct labor 640,000 80,000 720,000 Overhead 960,000 84,000 1,044,000 Selling expenses 560,000 62,000 622,000 Administrative expenses 480,000 1,000 481,000 Total costs and expenses 3440000 327000 3767000 Operating income $560,000
$123,000 $683,000
Calculations: Normal volume sales: 80,000 units x $50 per unit = $4,000,000 Additional revenue from new order: 10,000 units x $45 per unit = $450,000 Additional direct materials: 10,000 units x $10.00 per unit = $100,000 Additional direct labor: 10,000 units x $8.00 per unit = $80,000 Additional variable overhead: 10,000 units x $8.40 per unit = $84,000 Additional selling and administrative expense: 10,000 units x ($4.20 + $2) per unit = $62,000 The company should accept the offer because the additional sales would yield an incremental net income of $123,000. Other Factors to consider: Is there any effect on sale price of existing customer, if they come to know sale to new customer at lower price. Will new customer demand special price in future also. Operating at full capaity is possible without any lag. Effect on sales of existing customer due to shift of some focus on new order. If order is for 15,000, it is not possible to fulfill the demand.

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