Foundations,Inc.produces and sells cosmetic products.Currently,the company is operating at 70% of its capacity.The sales price of its product is $30 per unit,and it incurs a full cost of $25 to produce each unit.Its yearly fixed manufacturing overhead amounts to $20,000.The company has received a one-time order for supplying 5,000 units at $26 per unit.This order can be executed within the excess production capacity and will not involve any additional fixed costs.To make this decision,the management of Foundations should use ________.

Question

Quizplus · Accepted Answer

Variable costing is appropriate for short-term decisions as it only considers the variable costs associated with production, which are relevant for short-term decisions. The one-time order for 5,000 units is a short-term decision as it will not impact the company's long-term operations. Using variable costing, the contribution margin per unit is $5 ($30 - $25) and the total contribution margin for the order is $25,000 ($5 x 5,000 units). This is higher than the current fixed manufacturing overhead of $20,000, so the company should accept the order.