Answer:
a) Contribution margin per unit $5
b)
Decision:
Gibson should accept the special order because doing so would increase its income by $35,000
Explanation:
T<em>o determine whether or not GIbson should be accept the order, we compare the variable cost of the order to the sales value . If the special order generates a positive contribution margin, then it should be accepted.'</em>
The relevant cash flows to be considered here includes
1. Variable cost of the special order
2. Sales revenue from the special order.
<em>Note that the fixed cost are general unavoidable costs which would be incurred either way. And therefore should not be considered .</em>
Variable cost of a unit = total variable cost/ units product.
Unit variable cost = 276,000/ 12,000 = $23
Contribution margin per unit = selling price - unit variable cost
= $28 - $23
= $5
Total contribution = contribution margin × units
Total contribution = $5 × 7,000 = $35,000
b) Decision:
Gibson should accept the special order because doing so would increase its income by $35,000