Question
Carney's Battery Company is considering accepting a special order for 20,000 batteries that it received from a discount retail store. The order specified a price
Carney's Battery Company is considering accepting a special order for
20,000 batteries that it received from a discount retail store. The order specified a price of $4.00
per unit, which reflects a discount of $0.80 per unit relative to the company's regular price of $4.80 per unit. Carney's accounting department has prepared the following analysis to show the cost savings resulting from additional sales:
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Part 1
Requirements
(a) | Should the order for the 20,000 units at a price of $4.00 be accepted? What will be the impact on Carney's operating income? |
(b) | Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest? |
(c) | What other considerations are important in this case? Why? |
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Part 1
Requirement a. Should the order for the
20,000
units at a price of
$4.00
be accepted? What will be the impact on
Carney's
operating income?
Begin by determining the contribution margin per unit for this order. (Use parentheses or minus sign to show a negative contribution margin per unit.)
Less: | ||
Contribution margin per unit |
Part 2
Now determine the effect on
Carney's
operating income if it accepts this order.
First determine the formula then calculate the incremental profit or loss as a result of this order. (Complete all input cells. Enter a "0" for items with a zero balance. Use parentheses or minus sign to show a negative contribution margin or an incremental loss.)
- | = | Incremental profit (loss) | ||||
- | = |
Part 3
Should the order for the
20,000
units at a price of
$4.00
be accepted?
carney's
should
should not
accept the order for the
20,000
units at a price of
$4.00
because it's operating income will
decrease
increase
if it accepts this order.Part 4Requirement b. Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest?
Yes
No
,
the accounting department's analysis
is
is not
the best way to evaluate this decision. Average unit costs
are the most accurate reflection of costs
can be misleading
.
Fixed costs
are
are not
relevant to this decision. The decision should be based on
average
incremental
costs.Part 5Requirement c. What other considerations are important in this case? Why?
Other considerations: | Why: |
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