Question

F Question 1: Special order

Sales volume in units	120
Revenue	$9,600
Variable costs	$3,600
Contribution margin	$6,000
Fixed costs	$1,400
Profit	$4,600

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	$9,600
Variable costs	$3,600
Contribution margin	$6,000
Fixed costs	$1,400
Profit	$4,600

Should you take the special order? Why?

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
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

A)  

Page No. Given T20 Revenue Sale 9600 - so Price per unit 1 units Special order Sale Price = 80-40 - variable Cost Per unit = 3600 = 300 Per unit fixed Cost = 1400 12 Special order to units Ted Sales Revenue - yox40 - 1600 Variable cost = 40 X 16 = 640 contribution margin = 1600-640 - 960

	GROSS APPROACH
	PARTICULARS	status quo (no special order)	special order	total amounts after adding the special order
		A	B	(A+B)
	Revenue	$9,600	$1,600	$11,200
LESS ;	Variable costs	$3,600	$640	$4,240
	Contribution margin	$6,000	$960	$6,960
LESS;	Fixed costs	$1,400	$0	$1,400
	Profit	$4,600	$960	$5,560

YES THE PROFIT IS POSTIVE WITH THE SPECIAL ORDER

b)

INCREMENTAL APPROACH

	PARTICULARS	how much each amount changes after adding the special order
	Incremental revenue	1600
LESS :	Incremental variable costs	640
	Incremental contribution margin	960
LESS;	Incremental fixed costs	0
	Incremental profit	960

YES

iNCREMENTAL PROFIT IS POSITIVE