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 $33 per DVD player. The total manufacturing cost per DVD player is $14 and consists of variable costs of $10 per DVD player and fixed overhead costs of $5 per DVD player. (NOTE: Assume excess capacity and no effect on regular sales.) Should Blue Technologies accept or reject the special sales order?
A)Accept, because operating income would increase $320,000.
B)Reject, because operating income would decrease $120,000.
C)Accept, because operating income would increase $120,000.
D)Reject, because operating income would decrease $230,000.

Question

Quizplus · Accepted Answer

To determine whether Blue Technologies should accept or reject the special sales order, we need to calculate the incremental revenue and incremental cost of accepting the order.

Incremental Revenue:

$22 per DVD player x 10,000 DVD players = $220,000

Incremental Cost:

Variable cost per DVD player = $10

Fixed overhead cost per DVD player = $5

Total incremental cost per DVD player = $15

Total incremental cost for 10,000 DVD players = $150,000

Contribution Margin:

Selling price per DVD player - Total incremental cost per DVD player

$33 - $15 = $18

Total contribution margin for 10,000 DVD players = $180,000

Operating Income:

Total contribution margin - Total fixed overhead cost

$180,000 - $50,000 = $130,000

Since the special sales order would result in an increase of $130,000 in operating income ($220,000 incremental revenue - $150,000 incremental cost), Blue Technologies should accept the order. Therefore, the correct answer is C.

Blue Technologies Manufactures and Sells DVD Players