Question

Question 1: Special order Sales volume in units 110 Revenue $11,000 Variable costs $3,300 Contribution margin $7,700 Fixed costs $1,600 Profit $6,100 Special order: A client wants to buy 10 units at a discounted price of $40 per unit. This is a one-time deal (i.e., a short-term decision). You have enough spare capacity to fulfill this special order without cutting back on your regular sales. a) Use the gross approach to decide whether you should take the special order: status quo (no special order) total amounts after adding the special order Revenue $11,000 Variable costs $3,300 Contribution margin $7,700 Fixed costs $1,600 Profit $6,100 Should you take the special order

Answer 1

Answer:

Yes, the special order must be taken. Because Special order is bringing an additional contribution of $100

Explanation:

Units                                                110 units      120 units

Revenue                                           $11,000       $11,400

Less Variable Costs                        ($3,300)      ($3,600)

Contribution margin                         $7,700        $7,800

Less  Fixed costs                             ($1,600)       ($1,600)

Profit                                                  $6,100        $6,200

Therefore, the Financial advantage of manufacturing 120 units from 110 units is $100

That means the Special order is bringing an additional contribution of $100.

Values of Sales and Variable costs have increase by the following as a result of special offer :

Sales = $400

VC = $300