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 1,500 of the US umbrellas at a price of $11 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 $5.00
Direct labor 2.00
Variable manufacturing overhead 3.50
Fixed manufacturing overhead 2.50
Total cost $13.00
Regular sales price $19.00
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 2,000 umbrellas for $9.00 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.

Answer 1

The incremental profit from accepting the special order is -$3,000. Mohave should not accept the special order. If the special order was to purchase 2,000 umbrellas for $9.00 each, the incremental profit would be -$8,000. The special-order price per unit at which Mohave would be indifferent is $13.00.

Step-by-step explanation:

1. To compute the incremental profit from accepting the special order, we need to calculate the difference between the total cost of producing 1,500 umbrellas and the total revenues from selling them. The total cost for producing 1,500 umbrellas is $13.00 * 1,500 = $19,500. The total revenues from selling the umbrellas is $11.00 * 1,500 = $16,500. The incremental profit is the difference between the total revenues and the total cost, which is $16,500 - $19,500 = -$3,000.

2. Based on the incremental profit of -$3,000, Mohave should not accept the special order because it would result in a loss.

3. If the special order was to purchase 2,000 umbrellas for $9.00 each, the total cost for producing 2,000 umbrellas would be $13.00 * 2,000 = $26,000. The total revenues from selling the umbrellas would be $9.00 * 2,000 = $18,000. The incremental profit would be $18,000 - $26,000 = -$8,000.

4. If Mohave is operating at full capacity, the special-order price per unit at which Mohave would be indifferent between accepting or rejecting the special order would be the total cost per unit for producing 1 umbrella. The total cost per unit is $13.00/1 = $13.00.

Answer 2

Mohave Corp.

1. The incremental profit from accepting the special order is:

= $750.

2. Mohave should accept the special order.

Step-by-step explanation:

a) Data and Calculations:

Special order quantity = 1,500

Special order price = $11 per unit

Direct materials $5.00

Direct labor 2.00

Variable manufacturing overhead 3.50 $10.50

Fixed manufacturing overhead 2.50

Total cost $13.00

Regular sales price $19.00

Relevant costs:

Direct materials $5.00

Direct labor 2.00

Variable manufacturing overhead 3.50 $10.50

Incremental Analysis:

Special order price = $11.00

Variable cost per unit = $10.50

Incremental profit per unit $0.50

Total incremental profit = $750 ( $0.50 * 1,500)