Question

A company incurs costs of $38 per unit ($27 variable and $11 fixed) to make a product that normally sells for $56. A wholesaler offers to buy 3,500 units at $36 each. This special order will result in additional shipping costs of $1.15 per unit. Assuming the company has adequate manufacturing capacity, it should? *

Answer 1

Answer:

It should accept the special order at the price of $36 as the total marginal cost will be $28.5 (27 variable cost + 1.15 shipping cost).

Explanation:

Special orders are accepted only if marginal revenue increases the marginal cost. Marginal cost is the total cost incurred to fulfill any order.

In the given scenario, since the Company already has adequate capacity and it will not incur any additional fixed cost, therefore the order can be accepted by taking variable cost in to consideration.

Marginal Revenue               36

Less: Marginal Cost

Variable Cost                      (27)

Shipping Cost                   (1.15)

Total Profit from Order   7.85