Question 1: Special order Sales volume in units 110 Revenue $6,600 Variable costs $2,200 Contribution margin $4,400 Fixed costs $1,500 Profit $2,900 Special order: A client wants to buy 40 units at a discounted price of $40 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 total amounts after adding order) the special order Revenue $6,600 8200 Variable costs $2,200 3800 x Contribution margin $4,400 Fixed costs $1,500 Profit $2,900 Should you take the special order? Why? NO -- the low price for the special order reduces the contribution margin YES -- the profit is positive with the special order YES -- the profit is higher with the special order x a) Use the gross approach to decide whether you should take the special order: status quo (no special total amounts after adding order) the special order Revenue $6,600 8200 Variable costs $2,200 3800 x Contribution margin $4,400 Fixed costs $1,500 Profit $2,900 Should you take the special order? Why? ONO -- the low price for the special order reduces the contribution margin YES -- the profit is positive with the special order YES -- the profit is higher with the special order 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 1600 Incremental variable costs x Incremental contribution margin x Incremental fixed costs 0 Incremental profit x Should you take the special order? Why? YES -- the total profit is positive NO -- the incremental profit is lower than the original profit YES -- the incremental profit is positive