Assume that a company with 100,000 unit capacity is currently producing and selling only 90,000 units of product each year at a regular price of $2. If the variable cost per unit is $1 and the annual fixed cost is $45,000, the income statement looks like:

		Per Unit
Sales (90,000 units)	$180,000	$2.00
Less: Variable cost (90,000 units)	$90,000	$1.00
Contribution Margin	$90,000	$1.00
Fixed Cost	$45,000	$0.50
Net Income	$45,000	$0.50

The company has just received an order that calls for 10,000 units @ $1.20, for a total of $12,000. The acceptance of this order will not affect regular sales. The company president is reluctant to accept the order, however, because the $1.20 price is below the $1.50 factory unit cost ($1.50 = $1.00 + $0.50). Should the company accept this offer?

Select one:

a. No, do not accept the order. The president is correct, the price for the special order will be below unit cost and the company will lose $0.30 for each unit it produces.

b. Yes, accept the order. The presidents analysis is flawed because the unit price still remains above unit variable cost and a contribution margin of $0.20 per unit, results.

c. No decision can be made based on the information provided. The factory is already operating at full capacity of 100,000 units and another order cannot be accepted.

d. No, do not accept the order. Netting the contribution margin of $0.20 against the $0.30 per unit negative cost still results in a $0.10 loss for each unit it produces.