Question

Minor Electric has received a special one-time order for 1,100 light fixtures (units) at $9 per unit. Minor currently produces and sells 8,500 units at $11.00 each. This level represents 85% of its capacity. Production costs for these units are $8.50 per unit, which includes $6.50 variable cost and $2.00 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,200 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order

Answer 1

Answer:

Minor Electric

The company should accept the special order.  It makes a unit contribution of $1.41, which amounts to $1,551 in total.

Explanation:

a) Data and Calculations:

Special order received for light fixtures = 1,100 units

Price of special order = $9 per unit

Production and sales units = 8,500 = 85% capacity

Total capacity = 10,000 units (8,500/0.85)

Selling price at production and sales units = $11.00 each

Production costs per unit = $8.50

Variable cost per unit = $6.50

Fixed cost per unit = $2

Cost of new machine required for special order = $1,200

Special order costs:

Variable cost per unit = $7,150 ($6.50 * 1,100)

Cost of new machine =   1,200

Total relevant costs =   $8,350

Unit cost = $7.59 ($8,350/1,100)

Selling price = $9.00

Contribution per unit = $1.41