Question 1: Special order

Sales volume in units	100
Revenue	$6,000
Variable costs	$2,000
Contribution margin	$4,000
Fixed costs	$1,400
Profit	$2,600

Special order: A client wants to buy 20 units at a discounted price of $30 per unit. This is a one-time deal (i.e., a short-term decision). You have enough spare capacity to fulfill this special order without cutting back on your regular sales. a) Use the gross approach to decide whether you should take the special order:

	status quo (no special order)	total amounts after adding the special order
Revenue	$6,000
Variable costs	$2,000
Contribution margin	$4,000
Fixed costs	$1,400
Profit	$2,600

Should you take the special order? Why?

YES -- the profit is positive with the special orderYES -- the profit is higher with the special order NO -- the low price for the special order reduces the contribution margin

b) Use the incremental approach to decide whether you should take the special order.

	how much each amount changes after adding the special order
Incremental revenue
Incremental variable costs
Incremental contribution margin
Incremental fixed costs
Incremental profit

Should you take the special order? Why?

YES -- the total profit is positiveYES -- the incremental profit is positive NO -- the incremental profit is lower than the original profit