A company normally sells a product for $20 per unit. Variable per unit costs for this product are: $2 direct materials, $4 direct labor, and $1.50 variable overhead. The company is currently operating at 70% of capacity producing 14,000 units per year. Total fixed costs are $42,000 per year. The company should not accept a special order for 2,000 units which would be sold for $10 per unit because there would be an incremental loss on the order.

Question

Quizplus · Accepted Answer

The calculation for per unit incremental income is incorrect. It should be $10.00 - $7.00 = $3.00, which means there would be a $6,000 incremental profit on the special order. Therefore, the company should accept the special order.

A Company Normally Sells a Product for $20 Per Unit