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 $3.00 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?

Question

Quizplus · Accepted Answer

The incremental revenue from the special order would be $7,500 (1,500 units x $5 per unit). The incremental cost of producing these units would be $6,750 (1,500 units x $4.50 per unit + $1,000 for the new machine). Therefore, the incremental profit from the special order would be $750 ($7,500 - $6,750). Since the incremental revenue exceeds the incremental cost, the company should accept the special order. False statements in other choices:
A) The additional production does not exceed capacity as the current production level represents 75% of capacity.
B) The incremental revenue exceeds the incremental cost, so this statement is false.
D) This statement is false because the incremental revenue exceeds the incremental cost.
E) There is no information provided to suggest that the incremental revenue is too low.

Parker Plumbing Has Received a Special One-Time Order for 1,500