Question

Annually, xyz produces and sells 5,000 units of a product at its maximum capacity. The selling price is $600 per unit. The variable production cost is $150 per unit, and the fixed production cost is $300 per unit.

A customer has requested a special one-time order for 400 units of the product for $350 each. Accepting this special order will mean a loss of regular sales. However, this special order would not affect the total fixed cost. What is the financial advantage (disadvantage) for Bothell to accept this special order?

Multiple Choice

• ($100,000)

• ($56,000)

• ($80,000)

• $80,000

Answer 1

Answer: Option a. ( $ 100,000)

xyz produces and sells 5,000 units of a product at its maximum capacity. That means XYZ have to cut sales from regular market in order to serve special order. Accepting this special order will mean a loss of regular sales.

Thus, We need to compare contribution margin per unit in order to compute advantage or disadvantage for Bothell to accept special order.

Financial advantage (disadvantage) = Increase/decrease in contribution margin per unit * Number of units

= $ 250 per unit * 400 units

= $ 100,000

Thus, Financial disadvantage for Bothell to accept this special order is $ 100,000 [ Answer: Option a. ( $ 100,000) ]

Working note:

1. Calculation of Increase/decrease in contribution margin per unit is as follows:

Increase/decrease in contribution margin per unit = Contribution margin per unit from regular sales - Contribution margin per unit from special order

= $ 450 - $ 200

= $ 250

Thus, Decrease in contribution margin per unit is $ 250 if we accpet special order.

2. Contribution margin per unit from regular sale is as follows:

Contribution margin per unit from regular sales = Selling price per unit - Variable cost per unit

= $ 600 - $ 150

= $ 450 per unit

3. Calculation of Contribution margin per unit from special order is as follows:

Contribution margin per unit from special order = Selling price per unit - Variable cost per unit

= $ 350 - $ 150

= $ 200 per unit

Note:

Fixed cost have been ignored as it will be incurred both of cases. Thus, for decision marking it is irrelevant cost.