I would like the answer to part B as I have already completed A. Please also indicate why the Price Discount of $10 is not a Variable Cost and does not affect the Contribution Margin i.e decrease the contribution margin from 20 to 10.

Company X manufactures soft drinks. Its manufacturing plant has the capacity to produce 10,000 cases each month; current production and sales are 7,500 cases per month. The company normally charges $150 per case. Cost information for the current activity level is as follows:

Variable costs that vary with units produced

Direct materials ---------------------------------------------$ 262,500

Direct manufacturing labour -------------------------------- 300,000

Variable costs (for setups, materials handling, quality control, and so on) that vary with number of batches, 150 batches x $500 per batch ---------------------------------------75,000 Fixed manufacturing costs ------------------------------------275,000

Fixed marketing costs -----------------------------------------175,000

Total costs ---------------------------------------------------$ 1,087,500

Company X has just received a special one-time-only order for 2,500 cases at $100 per case. Company X usually makes its soft drinks for its existing customers in batch sizes of 50 case (150 batches x 50 cases per batch = 7,500 cases). The special order requires them to make the cases in 25 batches of 100 each

(a) Should Company X accept this special order? Why? Explain briefly.

PARTICULARS	CURRENT CALCULATION	CURRENT	SPECIAL ORDER CALCULATION	SPECIAL ORDER
Direct material per case	262,500/7,500	35		35
Direct Labour per case	300,000/,7500	40		40
Variable cost	$500 150 7,500	10	$500 25 2,500	5
Total Variable Cost (Relevant)		35 + 40 + 10 = 85		35 + 40 + 5 = 80
Selling Price	7500 $150 = $1,125,000	150	2500 $100 = $25,000	100
Contribution Margin		150 85 = 65		100 80 = 20
Total additional Contribution			20 2500 cases
Net Income			$50,000	$50,000

The offer should be accepted.

(b) As in requirement (a) assume that monthly capacity is 10,000 cases. Company X is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $10 in the month in which the special order is being filled. They would argue that Company X capacity costs are now being spread over more units, and that existing customers should get the benefit of these lower costs. Should Company X accept the special order under these conditions? Show all calculations.