Screen Saver Industries has spare production capacity due to the cancellation of a customer order. An overseas retail chain has offered the business an order for 300 units at a price of $25 each. The variable cost of the units is $20 each and the fixed costs are $3 per unit. What will be the impact on Screen Saver's profit if the special order is accepted?

Question

Quizplus · Accepted Answer

First, we need to calculate the total contribution margin for the special order:

Total revenue = 300 units x $25 per unit = $7,500
Total variable cost = 300 units x $20 per unit = $6,000
Total contribution margin = $7,500 - $6,000 = $1,500

Next, we need to calculate the impact on profit by subtracting the total cost of the special order from the total contribution margin:

Total cost = 300 units x ($20 variable cost + $3 fixed cost) = $6,900
Profit impact = $1,500 - $6,900 = -$5,400

Since the profit impact is negative, accepting the special order would actually result in a decrease in profit of $5,400. Therefore, the best choice is not to accept the special order.

Screen Saver Industries Has Spare Production Capacity Due to the Cancellation