Question 1: Special order Sales volume in units 90 Revenue $6,300 Variable costs $900 Contribution margin $5,400 Fixed costs $1,600 Profit $18 Special order: A client wants to buy 10 units at a discounted price of $30 per unit. This is a one-time deal (l.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 $6,300 Variable costs $900 Contribution margin $5,400 Fixed costs $1,600 Profit $3,800 Should you take the special order? Why? YES -- the profit is higher with the special order O NO the low price for the special order reduces the contribution margin YES the prontis positive 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 Incremental variable costs Incremental contribution margin Incremental fixed costs incremental profit Question 2: Should you reduce the price or increase advertising? The selling price is $30/unit, variable costs are $20/unit, and fixed costs are $3,000 in total. Sales volume decreased to 200 units because of a recession. You are considering two options to stimulate sales: (1) Reduce the price to $28/unit. This will increase sales volume by 20%. (2) Buy additional advertising for $300 and keep the original price. This will increase sales volume by 20%. Use the gross approach to decide whether you should do nothing (the status quo), reduce the price, or increase advertising. status quo (1) reduce the price (2) increase advertising Volume in units Revenue Variable costs Contribution margin Fixed costs Profit *enter losses as a negative number: e.g., a loss of $500 should be entered as -500, not as (500) or ($500). What should you do? Reduce the price Do nothing Increase advertising