Using the contribution margin approach for a special order decision
Shenyang Company, which produces and sells a small digital clock, bases its pricing strategy on a 35 percent markup on total cost. Based on annual production costs for 10,000 units of product, computations for the sales price per clock follow.
Unit-level costs | $150,000 |
Fixed costs | 50,000 |
Total cost (a) | 200,000 |
Markup (a × 0.35) | 70,000 |
Total sales (b) | $270,000 |
Sales price per unit (b ÷ 10,000) | $27 |
Required
a.Shenyang has excess capacity and receives a special order for 4,000 clocks for $17 each. Calculate the contribution margin per unit; based on it, should Shenyang accept the special order?
b. Support your answer by preparing a contribution margin income statement for the special order.
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