A company normally sells a product for $25 per unit. Variable per unit costs for this product are: $3 direct materials, $5 direct labor, and $2 variable overhead. The company is currently operating at 100% of capacity producing 30,000 units per year. Total fixed costs are $75,000 per year. The company should accept a special order for 1,000 units which would be sold for $13 per unit because the special order price exceeds variable costs.

Question

Quizplus · Accepted Answer

The company should not accept the special order because the sale price of $13 per unit does not cover the full cost of production. The variable costs per unit are $3 + $5 + $2 = $10, which means the company would lose $2 per unit if they accepted the special order. Since there is no unused capacity, the company would have to sacrifice production of a regular unit to produce a special unit and the lost contribution margin would add to the loss. Therefore, the special order should be rejected.

A Company Normally Sells a Product for $25 Per Unit