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 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

Answer 1

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Answer 1
Calculation per unit figures	Total	Per Unit
Units	90.00
Revenue	8,100.00	90.00	This is Revenue/ Units.
Variable costs	2,700.00	30.00	This is Variable costs/Units.
Contribution margin	5,400.00	60.00	This is Contribution margin/Units.
Gross Approach	No Special order	Special order
Revenue	8,100.00	8,100.00
Add: Special order (40*40)		1,600.00
Total Revenue	8,100.00	9,700.00
Less:
Variable costs	2,700.00	2,700.00
Special order (40*30)		1,200.00
Contribution margin	5,400.00	5,800.00
Fixed costs	1,600.00	1,600.00
Profit	3,800.00	4,200.00
Yes the special order should be taken because:
YES -- the profit is higher with the special order.
Answer 2
Incremental approach	Amount $
Revenue from Special order 40*40	1,600.00
Total Revenue	1,600.00
Less:
Variable costs for Special order (40*30)	1,200.00
Incremental Profit	400.00
Fixed costs are sunk costs and relevant for the special order.
Yes the special order should be taken because:
YES -- the incremental profit is positive.