Figure 9-7
Meco Company produces a product that has a regular selling price of £360 per unit. At a typical monthly production volume of 2,000 units, the product's average unit cost of goods sold amounts to £270. Included in this average is £120,000 of fixed manufacturing costs. All selling and administrative costs are fixed and amount to £30,000 per month.
Meco Company has just received a special order for 1,000 units at £240 per unit. The buyer will pay transportation, and the regular selling price will not be affected if Meco accepts the order.
-Refer to Figure 9-7. Assuming Meco Company is operating at capacity and accepting the order would require an offsetting reduction in regular sales, the effect on profits of accepting the order would be a

Question

Quizplus · Accepted Answer

Accepting the special order would require reducing regular sales, which means Meco Company would lose out on the contribution margin of those regular sales. The contribution margin per unit on the regular sales is £90 (£360 - £270), so losing out on 1,000 units would result in a contribution margin loss of £90,000. In addition, the fixed manufacturing costs of £120,000 would still be incurred, resulting in a total cost of £390 per unit. Since the special order price is only £240 per unit, Meco would lose £150 per unit (£390 - £240). Multiplying this by the 1,000 units in the special order results in a total profit decrease of £150,000. Therefore, the best answer is C.

Figure 9-7 Meco Company Produces a Product That Has a Regular Selling