Question

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

Answer 1

	Status Quo	After Adding
Revenue	6300	6600
Variable costs	900	1000
Contribution Margin	5400	5600
Fixed costs	1600	1600
Profit	3800	4000
Yes, the profit is higher with special order
Since there is spare caapcity, there will be no change in fixed costs
Incremental Approach
Incremental Revenue	300
Incremental variable costs	100
Incremental Contribution Margin	200
Incremental Fixed cost	0
Incremental Profit	200
2
	Status Quo	Reduce price	Increase Ad
Volume in units	200	240	240
Revenue	6000	6720	7200
Variable costs	4000	4800	4800
Contribution Margin	2000	1920	2400
Fixed costs	3000	3000	3300
Profit	-1000	-1080	-900
Increase Advertising