Answer:
Calla Company:
1. Comparative Income Statement:
This is attached.
a) Sales:
i) Normal = $69 * 80,100 = $5,526,900
ii) Special order = $64 * 14,900 = $953,600
iii) Combined = $6,480,500
b) Direct Materials Cost:
i) Normal = $937,170
ii) Special order = $174,330 ($937170/80,100 x 14,900)
iii) Combined = $1,111,500
c) Direct Labour Cost:
i) Normal = $680,850
ii) Special = $126,650 ($680,850/80,100 x 14,900)
iii) Combined = $807,500
d) Overhead Costs:
i) Normal - $959,000
ii) Special = $107,034 ((60% of $959,000)/80,100 x 14,900)
iii) Combined = $1,066,034
e) Selling Expenses:
i) Normal = $549,000
ii) Special = $61,274 (60% of $549,000)/80,100 x 14,900)
iii) Combined = $610,274
f) Administrative:
i) Normal = $475,000
ii) Special = $810
iii) Combined = $475,810
2. Advise:
Calla should accept this order. Income would increase by more than $400,000.
Explanation:
This is "an accept or reject" special order type of decision. To compute costs, only relevant costs, which will vary with the special order, are considered. Sunk costs, which do not make a difference, are not taken into account in arriving at the income for the special order.
This analysis is also called Incremental Analysis or Differential Analysis. It helps management to make a decision of whether to accept the special order or not. It is an important technique in managerial accounting.