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 2,800 of the US umbrellas at a price of $26 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 $ 11.00 Direct labor 6.00 Variable manufacturing overhead 7.50 Fixed manufacturing overhead 2.50 Total cost $ 27.00 Regular sales price $ 34.00 Required: 1. Compute the incremental profit (or loss) from accepting the special order. 2. Should Mohave accept the special order

The incremental profit is $4,200. Mohave should accept this order.

Explanation:

(1) Variable cost per unit = Direct materials + Direct labor + Variable manufacturing overhead

Variable cost per unit = $11 + $6 + $7.5 = $24.5

Incremental profit = (Sale price per unit - Variable cost per unit) x Units sold

Incremental profit = ($26 - $24.5) x 2,800 = $4,200

(2) Mohave should accept the special order because it is resulting in a profit for the business. We are also informed that Mohave has the excess capacity necessary to accept the order. Hence, no additional fixed costs are incurred in accepting the order, implying that it is overall a profitable transaction for Mohave which it should accept.

1.Incremental loss = $2 800.  

2.2. No. Mohave should not accept the special order as it will cost more to make than they would get back.

Explanation:

To make 2800 umbrellas would cost the company: $27 * 2800 units = $75 600.

If they sell them at the regular selling price, they would make: $34 * 2800 = $95 200.

At the special price of $26, they make: $26 * 2800 = $72 800.

Profit / Loss from the special order: $72 800 - $75 600 = - $2 800.

From the above calculations, it is evident that the company would run make a loss.

1.Incremental loss = $2 800.  

2.2. No. Mohave should not accept the special order as it will cost more to make than they would get back.

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