Suppose you are at a meeting of Cordell Company managers, and someone asked the following questions. Some of the answers given by your colleagues follow:

Q What will be the change in the contribution margin if we accept this order?

A The contribution margin will increase to €14,000,000.

Q In your analysis (Exhibit 5.6), you show that fixed costs do not change if we accept the order. Are these costs relevant?

Exhibit 5.6

A No. Fixed costs are not relevant.

Q OK. But do fixed costs that we incur have an effect on the bottom line of our company?

A Certainly. That is why we deduct fixed costs from the contribution margin to get operating income.

Q Well, if fixed costs affect the bottom line, how can you say they are not relevant? Comment on your colleague’s answers and answer the last question.

Transcribed Image Text:

Sales Less: Variable expenses Manufacturing Selling and administrative Total variable expenses Contribution margin Less: Fixed expenses Manufacturing Selling and administrative Total fixed expenses Operating income Without special order 1,000,000 units €40,000,000 €24,000,000 2,200,000 €26,200,000 €13,800,000 € 6,000,000 5,800,000 €11,800,000 € 2,000,000 Effect of special order, 100,000 units Per unit Total €2,600,000 €26 €2,400,000 €2,400,000 €24 € 200,000 € 2 € 200,000 €24 SED € 2 With special order, 1,100,000 units €42,600,000 €26,400,000 2,200,000 €28,600,000 €14,000,000 € 6,000,000 5,800,000 €11,800,000 € 2,200,000