Reference: 23_02
Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker 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 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

Full capacity: 7,500/.75 = 10,000 units
Idle capacity: 10,000 units - 7,500 unit = 2,500 units
So, idle capacity exists for special order of 1,500 units
Special order: [($5 - 3) x 1,500] - $1,000 = $2,000 incremental benefit

Reference: 23_02 Parker Plumbing Has Received a Special One-Time Order for 1,500