Question

Waterways mass-produces a special connector unit that it normally sells for $4.00. It sells approximately 38,000 of these units each year. The variable costs for each unit are $2.40. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 15,900 of these units at $2.70 per unit. The production of these units is near full capacity at Waterways, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.

An irrigation company has asked for a special order of 1,800 of the connectors. To meet this special order, Waterways would not need an additional shift, and the irrigation company is willing to pay $3.20 per unit.

What are the consequences of Waterways agreeing to provide the 15,900 units to the Canadian company? Would this be a wise “special order” to accept?
Should Waterways accept the special order from the irrigation company?
What would be the consequences of accepting both special orders?

Answer 1

The offer from Canadian company shall be accepted as the contribution is positive figure. That means it still leaves a sum of $3180 after meeting the expenses to manufacture and sell the unit.

Canadian Company - offer
Price Offered	2.7
Variable Cost per unit
Current	2.4
+ Increase in Manufacturing cost	0.3
- Decrease in Selling Cost	0.2
Net Variable Cost per unit	2.5
Contribution per unit	0.2
Quantity Sold	15900
Sales	42930
Variable cost	39750
Contribution	3180

The additional shift is required for production to meet the demand of irrigation company as well. Thus the ince=rease in manufacturing cost and decrease in selling cost also shall be there. The Contribtion shall be as follows-

Irrigation Company - offer
Price Offered	3.2
Variable Cost per unit
Current	2.4
+ Increase in Manufacturing cost	0.3
- Decrease in Selling Cost	0.2
Net Variable Cost per unit	2.5
Contribution per unit	0.7
Quantity Sold	1800
Sales	5760
Variable cost	4500
Contribution	1260

Accepting both the order shall result in a contribution of $4440.