Question

In April, a company with idle capacity has been contacted by a new customer to supply 100,000 units of its products for a special order at a price that is 25% below the company’s regular sales price. If accepted, the order will be completed and delivered in April. The order is identical to a committed order that will be produced in May. Which one of the following costs is relevant for the company’s decision whether to accept the special order?

• A.The direct materials that were purchased earlier for a production order that was canceled.
• B.The machine setup costs for the order.
• C.The electricity to operate the machinery in April to produce the units.
• D.The insurance on the machinery that will be used to produce the units.

Answer 1

The correct option is C

When we find out the cost of special orde, we see whether the company has the capacity already or not. Here in this question, it is mentioned that the company has idle capacity.

Therefore, we will only consider the variable costs.

A, B & D are options are not relevant, and only C, the electricity cost is variable cost and will be considered.