Question

Stuart 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 20,000 units of product, computations for the sales price per clock follow: Unit-level costs $ 420,000 Fixed costs 60,000 Total cost (a) 480,000 Markup (a × 0.25) 120,000 Total sales (b) $ 600,000 Sales price per unit (b ÷ 20,000) $ 30
Stuart has excess capacity and receives a special order for 7,000 clocks for $24 each. Calculate the contribution margin per unit. Based on this, should Stuart accept the special order?

Answer 1

Answer:

Stuart should accept the offer because the contribution margin os positive.

Explanation:

Giving the following information:

Units= 20,000

Total variable cost= 420,000

Total fixed cost= 60,000

Mark up= 25%

Special offer= 7,000 units for $24

To determine whether the offer is profitable or not, we need to calculate the unitary variable cost and the unitary contribution margin:

Unitary variable cost= 420,000/20,000= $21

Because it is a special offer and there is unused capacity we won't take into account the fixed costs:

Contribution margin= 24 - 21= $3 per unit

Stuart should accept the offer because the contribution margin os positive.