Question

Question 1: Special order Sales volume in units 80 Revenue $7.200 Variable costs $1,600 Contribution margin $5.500 Fixed costs $1,500 Prot $4,100 Special orders: A client wants to buy units at a counted price of $0 per unit. This is a one-time deale, a short-term decision). You have enough spare capacity to fulfil this special order without cutting back on your regular sales a) Use the gross approach to decide whether you should take the special orders status quo (no special total amounts after adding order) the special order Revenue $7,200 Variable costs $1,600 X Contribution margin $5,000 X Fred costs $1,500 x $4,100 4.400 ✓ Should you take the special order? Why? YES -- the profit is higher with the special order ONO the low price for the special order reduces the contribution margin YES -- the profit is positive with the social order b) Use the incremental approach to decide whether you should take the special order. how much each amount changes after adding the Increment venue Incremental variable co x

Answer 1

a.

PARTICULARS	STATUS QUO	TOTAL AMOUNTS
Revenue	$7,200	$7,200+$30*30=$8,100
Variable Costs (of 80 units)	$1,600	$1,600+30*$20(1600/80)=$2,200
Contribution Margin	$5,600	$8,100-$2,200=$5,900
Fixed Costs	$1,500	Not any change $1,500
Profit	$4,100	$5,900-$1,500 = $4,400

Yes, Profit is higher with special order.

b.

PARTICULARS	CHANGE
Incremental Revenue	$30*30=$900
Incremental Variable Cost	$20*30=$600
Incremental Contribution Margin	$900-$600=$300
Incremental Fixed Costs	no change
Incremental Profit	$300-0=$300
YES, INCREMENTAL PROFIT IS POSITIVE

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