Question 1: Special order Sales volume in units 120 Revenue $8,400 Variable costs $2,400 Contribution margin $6,000 Fixed costs $1,400 Profit $4,600 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 $8,400 10000 Variable costs $2,400 3040 x Contribution margin $6,000 6960 X Fixed costs $1,400 0 x Profit $4,600 5560 x Should you take the special order? Why? YES -- the profit is positive with the special order YES -- the profit is higher with the special order ONO -- the low price for the special order reduces the contribution margin x 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 640 X Incremental contribution margin 960 x Incremental fixed costs 0 Incremental profit 960 1x Should you take the special order? Why? NO -- the incremental profit is lower than the original profit YES -- the incremental profit is positive O YES -- the total profit is positive