Minor Electric has received a special one-time order for 1,500 light fixtures (units)at $5 per unit.Minor currently produces and sells 7,500 units at $6.00 each.This level represents 75% of its capacity.Production costs for these units are $4.50 per unit,which includes $3.00 variable cost and $1.50 fixed cost.To produce the special order,a new machine needs to be purchased at a cost of $1,000 with a zero salvage value.Management expects no other changes in costs as a result of the additional production.Should the company accept the special order?
A)No,because additional production would exceed capacity.
B)No,because incremental costs exceed incremental revenue.
C)Yes,because incremental revenue exceeds incremental costs.
D)Yes,because incremental costs exceed incremental revenues.
E)No,because the incremental revenue is too low.

Question

Quizplus · Accepted Answer

The incremental revenue from the special order is:
$5/unit x 1,500 units = $7,500

The incremental cost to produce the additional 1,500 units is:
($3 variable cost + $1.50 fixed cost) x 1,500 units + $1,000 for the new machine = $6,500

Since incremental revenue ($7,500) exceeds incremental cost ($6,500), the company should accept the special order.

Minor Electric Has Received a Special One-Time Order for 1,500