Blue Technologies manufactures and sells DVD players. Great Products Company has offered Blue Technologies $22 per DVD player for 10,000 DVD players. Blue Technologies' normal selling price is $30 per DVD player. The total manufacturing cost per DVD player is $12 and consists of variable costs of $14 per DVD player and fixed overhead costs of $4 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) Should Blue Technologies accept or reject the special sales order?

Question

Quizplus · Accepted Answer

Total revenue from the special order would be 10,000 x $22 = $220,000. The variable cost per unit is $14 and the fixed overhead cost per unit is $4, therefore the total cost per unit is $18. Thus, the total cost for this order would be 10,000 x $18 = $180,000.

The incremental operating income for this order would be $220,000 - $180,000 = $40,000. This is calculated as the difference between the revenue and total cost for the special order.

Since the incremental operating income is positive, accepting the special order would increase the overall operating income. Therefore, Choice C is the best option.

Blue Technologies Manufactures and Sells DVD Players