Hensely Company, which produces and sells a small digital clock, bases its prici

Question

Hensely Company, which produces and sells a small digital clock, bases its pricing strategy on a 25 percent markup on total cost. Based on annual production costs for 25,000 units of product, computations for the sales price per clock follow:

Required

Hensely has excess capacity and receives a special order for 8,000 clocks for $12 each. Calculate the contribution margin per unit. Based on this, should Hensely accept the special order?

Prepare a contribution margin income statement for the special order.

Unit-level costs $ 240,000 Fixed costs 60,000 Total cost (a) 300,000 Markup (a × 0.25) 75,000 Total sales (b) $ 375,000 Sales price per unit (b ÷ 25,000) $ 15

Explanation / Answer

Variable expense per unit = 240000/25000= $9.6 Contribution margin per unit = 12-9.6 = $2.4 Yes the special order should be accepted Income Statement Incremental revenue 96000 =8000*12 Variable costs 76800 =8000*9.6 Contribution profit 19200

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