Question 1: Special order Sales volume in units 80 Revenue $7,200 $1,600 Variable costs Contribution margin $5,600 Fixed costs $1,600 Profit $4,000 Special order: A client wants to buy 40 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 total amounts after adding order) the special order Revenue $7,200 Variable costs $1,600 x Contribution margin $5,600 Fixed costs $1,600 1600 Profit $4,000 Should you take the special order? Why? O YES -- the profit is higher with the special order YES -- the profit is positive 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 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? O NO -- the incremental profit is lower than the original profit O YES -- the total profit is positive YES -- the incremental profit is positive