Consider the following information, prepared based on a monthly capacity of 80,0

ID: 2427437 • Letter: C

Question

Consider the following information, prepared based on a monthly capacity of 80,000 units:

Category

Cost per Unit

Variable manufacturing costs

$24

Fixed manufacturing costs

Variable selling costs

Fixed selling costs

Capacity cannot be added in the month and the firm currently sells the product for $40 per unit.

Consider each of these scenarios independent of each other.

a) The company is currently producing 72,000 units per month. A potential customer has contacted the firm and offered to purchase 8,000 units this month only. The customer is willing to pay $33 per unit. Since the potential customer approached the firm, there will be no variable selling costs incurred. Should the company accept the special order? Why or why not? Be specific.

b) Assume the same facts as in part a, except that the company is producing 80,000 units per month. Should the company accept the special order? Why or why not? Be specific.

c) List and describe other factors (not those addressed in parts a and b) that should be taken into consideration when deciding whether to accept a special order? Be specific in your responses.

Category

Cost per Unit

Variable manufacturing costs

$24

Fixed manufacturing costs

Variable selling costs

Fixed selling costs

Explanation / Answer

Selling price per unit $40

less:Variable expense

Variable manufacturing cost ( $24)

Variable selling cost ( $4)

Contribution per unit $12

Fixed cost :

Manufacturing csot = 80,000 * 5 = $400,000

Fixed selling cost = 80,000*1 = 80,000

a) Constirbution = $33 - $24 = $9

increase in profit = 8,000 *9 = $72,000

(Fixed cost is sunk cost hence not considered)

b)No should not be accepted since it is already working at full capacity accepting the offer will mean replacing 8000 unit at low price

there will be decrease in profit of $24,000

c)other factors can be to see if their is any change in fixed cost due to the order