Question

Walton Company, which produces and sells a small digital clock, bases its pricing strategy on a 25 percent markup on total cost. Based on annual production costs for 15,000 units of product, computations for the sales price per clock follow. Unit-level costs $ 330,000 Fixed costs 78,000 Total cost (a) 408,000 Markup (a × 0.25) 102,000 Total sales (b) $ 510,000 Sales price per unit (b ÷ 15,000) $ 34 Required Walton has excess capacity and receives a special order for 4,000 clocks for $25 each. Calculate the contribution margin per unit. Based on this, should Walton accept the special order? Prepare a contribution margin income statement for the special order.

Answer 1

Explanation:

The computation of the contribution margin per unit is shown below:

Burt for that first we have to determine the variable expense per unit which is shown below:

Variable costs per unit = $330,000 ÷ 15,000 units

= $22

Now the contribution margin per unit is

= Selling price per unit - variable expense per unit

= $25 - $22

= $3

Therefore, the special order is accepted

And, the preparation of the contribution margin income statement is shown below:

Sales (4,000 clocks  × $25)                       $100,000

Less: Variable cost (4,000 clocks × $22) ($88,000)  

Contribution margin                                   $12,000