XYZ Company just got a call for a large special order for their computer circuit boards.This...

XYZ Company just got a call for a large special order for their computer circuit boards.This company has requested a 20% discount since they will be ordering a large number at one time. The one issue is that they would like the circuit boards to be purple, rather than their typical green. This would require a special piece of equipment at a cost of $10,000 that may only be used once for this order. How should XYZ proceed?

A) They should evaluate their variable costs, space in their manufacturing facility and this additional fixed equipment cost and see if they will make a profit with the 20% discount.

B) They should take the order as it is large and will produce a large amount of income.

C) They should not take the order as the special equipment may only be used once, so it is not a good investment.

Expert Solution

the acceptance of special order would mandate the company to purchase the special equipment worth $10,000

Also, the company is being asked to reduce the selling price by 20%

The company can only accept this order if there is some reduction in variable costs for this order or/and the size of the order is so big that the company is able to recover the reduced sales price and also the cost of special equipment.

the deciding factor is that the company should have profit from the special order if accepted.

option B) is incorrect because large order dosen't guarantee increased profits. it is possible that the reduced selling price is making the contribution margin per unit negative. in such a case, the order can't be accepted.

option C) is incorrect because it is possible that the special order is giving so big profit that the company is able to recover the cost of the special equipment even if the special equipment is used only once.

option A) is correct becuase the company needs to analyse both fixed cost (special equipment) and also any possible reduction of the variable cost and also whether they have even enough space to accomodate the special equipment to ascertain whether to accept the special order or not.

hence, the correct answer is option A) They should evaluate their variable costs, space in their manufacturing facility and this additional fixed equipment cost and see if they will make a profit with the 20% discount.

ekkarill92 answered 1 year ago

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