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 . The special-order umbrellas with the Lost Mine Company logo would be distributed to participants at an upcoming convention sponsored by Lost Mine Mine has offered to buy 1,900 of the US umbrellas at a price of $15 each. Mohave curently has the excess 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 S 7.00 3.00 3.00 Total cost Regular sales price Required: 1. Compute the incremental profit (or loss) from accepting the special order. ofit (or by

Explanation / Answer

1) Total relevant cost per unit to make US umbrella = $15.5-$2.5 = $13 Fixed cost is a sunk cost and hence it should be ignored Increamental profit from accepting the special order = ($15-$13)*1900 = $3800 2) Yes. Because it gives additional profits of $3800 3) Total relevant cost per unit to make US umbrella = $15.5-$2.5 = $13 Fixed cost is a sunk cost and hence it should be ignored Increamental loss from accepting the special order = ($13-$10)*2400 = $7200 4) If company is operating at full capacity then special order price per unit at which company would be indifferent between accepting or rejecting the special order is the total manufacturing cost of manufacturing including the fixed cost per unit (ie. $15.5)

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