Question

Minor Electric has received a special one-time order for 900 light fixtures (units) at $5 per unit. Minor currently produces and sells 4,500 units at $6.00 each. This level represents 75% of its capacity Production costs for these units are $4.50 per unit which includes $3.00 variable cost and $150 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $475 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $625 on the special order the size of the order would need to be Multiple Choice 550 units 1300 units 2,200 units 180 units 250 units

Answer 1

Based on the information available in the question, we can calculate the size of the special order as follows:-

Particulars	Amount
Sales Price	5
Less:-
Variable cost	(3)
Contribution margin per unit	2

Kindly note that Fixed costs of $1.5 per unit is irrelevant in accepting the special order as it continues to be incurred irrespective of whether accepting the Special order or not. Also, since accepting the special order would not result in any additional costs because the firm has excess capacity, there would not be any additional fixed expenses that Minor Electric has to incur in accepting the special order.

Hence, in order to calculate the required number of units to be sold to realize a profit of $625 on the special order, the minimum quantity that we need to sell is :-

=(Required Profit + Cost of machine)/Contribution margin per unit.

=($625 + $475)/2 per unit

=$1,100/2 per unit

Minimum Quantity = 550 units

Based on the above calculation, the correct answer is Option A - 550 units.

Option B is incorrect because 1,100 is the total amount that is required to recovered through the sale of goods from the special order and not the number of units.

Option C, Option D and Option E are incorrect per the calculations above.

Please let me know if you have any questions via comments and all the best :)