Elsea Company, which produces and sells a small digital clock, bases its pricing

Question

Elsea Company, which produces and sells a small digital clock, bases its pricing strategy on a 20 percent markup on total cost. Based on annual production costs for 16,000 units of product, computations for the sales price per clock follow $320,000 80,000 Unit-level costs Fixed costs Total cost (a) 400,000 80,000 Markup (a x 0.20) Total sales (b) Salas price per unit (b 16,000) S30 S480,000 Required a-1. Elsea has excess capacity and receives a special order for 5,000 clocks for $24 each. Calculate the contribution margin per unit from the special order per unit a-2. Should Elsea accept the special order? Yes O No b. Prepare a contribution margin income statement for the special order ELSEA C

Explanation / Answer

a-1) Contribution margin per unit from special order = Selling price per unit of special order - Variable cost per unit Variable cost per unit = $320000/16000 = $20 Contribution margin per unit from special order = $24-$20 = $4 per unit a-2) Yes. Because it gives an additional profit of $4 per unit b) ELESA COMPANY Income Statement Total sales revenue (5000*24) 120000 Total variable costs (5000*20) 100000 Contribution margin 20000

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