Question

ABC Inc., has been offered $35 for 1,000 summer-weight sleeping bags by a discount store. XYZ normally sells the bag for $47.50. The costs of the bag have been determined to be as follows:

Materials....................................      $15.00

Labor..........................................          7.50

Variable overhead.....................          5.00

Fixed overhead..........................       15.00

    Total.......................................      $42.50

Required:

1.   If XYZ has excess capacity in its production line and has no alternative use for the space that is idle, should the special order be accepted? Explain your views. [3

2.   Assume that XYZ is operating at full capacity. Should the order be accepted? Explain your views.

Answer 1

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Solution 1)	If ABC has idle capacity:
	Special order Price	$ 35
	Special order variable costs (15+7.5+5)	$ 27.5
	Contribution	$ 7.5
	Yes, accept the special order.

Solution 2)	If ABC is operating at full capacity:
	If ABC is operating at full capacity, there are opportunity costs equal to the current contribution margin of $20 ($47.50-$27.50). ABC should not accept a price less than the current market price of $47.50 unless there are compelling strategic reasons to do so.