Question

ABC company total cost of making a product is $18.00 per unit and included in that price is $6.00 fixed cost per unit. The company sells this product to the local customers for $22.00 per unit. ABC gets a request from a customer from oversea to buy 500 units from ABC for a price of $14.00 per unit. Answer the following questions: a) Should ABC company accept the special order? (Yes or No?) (see page 130-131). b) If ABC company accepts the special order, what is the contribution margin per unit? c) If ABC company accepts the special order, what would be the total contribution margin from the sales of the 500 units? d) Articulate one qualitative consideration in making "Special Order" decision.

Answer 1

Question A

Yes ABC Company should accept the order.

The rationale behind the decision is that the variable cost per unit is $ 12 per Unit whereas Fixed Cost per Unut is $ 6 which means that fixed cost is an allocated costs which is allocated upon current level of production and will not increase or decrease with the acceptance of special so it is not a part of relevant cost for decision making. Only the relevant costs should be considered for the decision making and sunk or past costs should be ignored.

Question B

Contribution Margin per Unit = Sales Price per Unit of Special Order - Variable Cost per Unit

Sales Price per Unit of Special Order = $ 14

Variable Cost per Unit = $ 12

Contribution Margin per Unit = 14 - 12

Contribution Margin per Unit = $ 2

Question C

Total Contribution Margin of Special Order = 500 Units of Special Order * Contribution Margin per Unit

Total Contribution Margin = 500 * 2

Total Contribution Margin = $ 1,000

Question D

The special consideration in accepting special order is that company is able to generate some incremental profit from it. Accepting an order which will not generate additional profit is of no use.