Damon,Inc.currently produces 30,000 sweatshirts each year for its regular customers and charges $30 per sweatshirt.Damon has capacity to produce an additional 5,000 sweatshirts if sales grow in the future.Variable costs total $16 per sweatshirt and annual fixed costs total $60,000.The city of Loveland recently approached the company and proposed a one-time purchase of 1,000 sweatshirts for $24 each.Should Damon accept the special order proposal?

Question

Quizplus · Accepted Answer

To determine if Damon should accept the special order proposal, we need to calculate the contribution margin per unit. 
Contribution margin per unit = Selling price per unit - Variable cost per unit 
= $30 - $16 
= $14

Since the proposed selling price for the special order is $24, the contribution margin per unit would be: 
Contribution margin per unit = Selling price per unit - Variable cost per unit 
= $24 - $16 
= $8

Therefore, Damon would make a profit of $8 per sweatshirt from the special order.

The total contribution margin for the special order would be: 
Total contribution margin for special order = Contribution margin per unit * Quantity 
= $8 * 1,000 
= $8,000

Since the total contribution margin from the special order exceeds the additional fixed costs of producing the extra 1,000 sweatshirts ($2,000), accepting the special order would increase Damon's overall profit. Therefore, the correct choice is C.

Damon,IncCurrently Produces 30,000 Sweatshirts Each Year for Its Regular Customers