Question

mohave corporation 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 offered to buy 2,100 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 $ 8.00 direct labor 4.00 variable manufacturing overhead 4.00 fixed manufacturing overhead 2.50 total cost $ 18.50 regular sales price $ 25.00 required: compute the incremental profit (or loss) from accepting the special order. should mohave accept the special order? suppose the special order had been to purchase 2,600 umbrellas for $15.00 each. recompute the incremental profit (or loss) from accepting the special order under this scenario. assume 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.

Answer 1

To determine whether Mohave Corporation should accept the special order for 2,100 us umbrellas at a price of $17 each, we need to calculate the incremental profit (or loss) from accepting the order. The incremental profit is the difference between the revenue from the special order and the relevant costs incurred in producing the order.

Revenue from the special order = 2,100 x $17 = $35,700

Relevant costs incurred in producing the order = direct materials + direct labor + variable manufacturing overhead = $8 + $4 + $4 = $16

Incremental profit = revenue - relevant costs = $35,700 - $16 x 2,100 = $1,500

Based on this calculation, Mohave Corporation would make an incremental profit of $1,500 by accepting the special order. Therefore, they should accept the order.

Now, let's consider the scenario where Lost Mine Industries wants to purchase 2,600 umbrellas for $15.00 each. The incremental profit calculation would be as follows:

Revenue from the special order = 2,600 x $15 = $39,000

Relevant costs incurred in producing the order = direct materials + direct labor + variable manufacturing overhead = $8 + $4 + $4 = $16

Incremental profit = revenue - relevant costs = $39,000 - $16 x 2,600 = -$2,400

Based on this calculation, Mohave Corporation would incur an incrementalloss of $2,400 by accepting the special order. Therefore, they should reject the order.

Finally, let's calculate the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order. This is called the indifference price and can be calculated by setting the incremental profit to zero and solving for the special-order price per unit. The calculation would be as follows:

Revenue from the special order = 2,100 x SP
Relevant costs incurred in producing the order = direct materials + direct labor + variable manufacturing overhead + (fixed manufacturing overhead / number of units produced) = $8 + $4 + $4 + ($2.50 / 2,100) = $16.0125

Setting the incremental profit to zero:
2,100 x SP - $16.0125 x 2,100 = 0
2,100 x SP = $16.0125 x 2,100
SP = $16.0125

Therefore, the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order is $16.0125. If Lost Mine Industries offered to pay a price per unit of $16.0125 or higher, Mohave Corporation should accept the order. If the price is lower than $16.0125, Mohave should reject the order.