Question

Li Company produces a product that sells for $84 per unit. A customer contacts Li and offers to purchase 2,000 units of its product at a price of $68 per unit. Variable production costs with this order would be $30 per unit, and variable selling expenses would be $18 per unit. Assuming that this special order would not require any additional fixed costs, and that Li has sufficient capacity to produce the product without affecting regular sales, determine if it would be a good decision to accept this special order.

Answer 1

Answer:

It should be accepted.

Total Contribution of $40,000

Explanation:

Special order:

$Sales \: Revenue - Variable \: Cost = Contribution \: Margin$

68 - 30 - 18 = 20 CM

$Contribution \: per \: unit \times units \: sold = Total \: Contribution \: Margin$

2,000 x 20 = 40,000 Total Contribution

No changes in the fixed cost, so this would be the net value of the order.

It should be accepted.