Question
Question 1: Special order Sales volume in units 90 Revenue $8,100 Variable costs $2,700 Contribution margin $5,400 Fixed costs $1,600 Profit $3,800 Special order: A
Question 1: Special order
Sales volume in units | 90 |
Revenue | $8,100 |
Variable costs | $2,700 |
Contribution margin | $5,400 |
Fixed costs | $1,600 |
Profit | $3,800 |
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 order) | total amounts after adding the special order | |
Revenue | $8,100 | |
Variable costs | $2,700 | |
Contribution margin | $5,400 | |
Fixed costs | $1,600 | |
Profit | $3,800 |
Should you take the special order? Why?
NO -- the low price for the special order reduces the contribution margin
YES -- the profit is higher with the special order
YES -- the profit is 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 |
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
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