Mervin Company produces circuit boards that sell for \(8 per unit. It currently has capacity to produce
600,000 circuit boards per year, but is selling 550,000 boards per year. Annual costs for the 550,000
circuit
boards follow.
Direct materials . \) 825,000
Direct labor 1,100,000
Overhead . 1,375,000
Selling expenses 275,000
Administrative expenses . 550,000
Total costs and expenses \(4,125,000
An overseas customer has offered to buy 50,000 circuit boards for \)6 per unit. The customer is in a different
market from Mervin’s regular customers and would not affect regular sales. A study of its costs in
anticipation of this additional business reveals the following:
Direct materials and direct labor are 100% variable.
Twenty percent of overhead is fixed at any production level from 550,000 units to 600,000 units; the
remaining
80% of annual overhead costs are variable with respect to volume.
Selling expenses are 40% variable with respect to number of units sold, and the other 60% of selling
expenses are fixed.
There will be an additional \(0.20 per unit selling expense for this order.
Administrative expenses would increase by a \)700 fixed amount.
Required
1. Prepare a three-column comparative income statement that reports the following:
a. Annual income without the special order.
b. Annual income from the special order.
c. Combined annual income from normal business and the new business.
2. Should management accept the order? What nonfinancial factors should Mervin consider? Explain.
Analysis Component
3. Assume that the new customer wants to buy 100,000 units instead of 50,000 units—it will only buy
100,000 units or none and will not take a partial order. Without any computations, how does this
change your answer in part 2?
