A manufacturer operating with excess capacity has been asked to fill a special order at $7.25 per unit. No other use of the currently idle capacity can be found. The manufacturer's usual variable costs per unit are $3.50 for direct materials, $1.50 for direct labour, $1.50 for variable overhead, and $0.50 for sales commission. No sales commission would be paid on this special order. The average overhead per unit is $0.25.
The expected contribution margin per unit for the special order is:
A) $0.00
B) $0.25
C) $0.75
D) $1.00

Question

Quizplus · Accepted Answer

Contribution margin per unit is calculated as follows:

Sales price per unit - Variable costs per unit

Sales price per unit = $7.25

Variable costs per unit = $3.50 (direct materials) + $1.50 (direct labour) + $1.50 (variable overhead) + $0 (no sales commission)

= $6.50

Contribution margin per unit = $7.25 - $6.50

= $0.75

Therefore, the expected contribution margin per unit for the special order is $0.75. This means that the special order will generate $0.75 in profit for the manufacturer for each unit sold. Since there is no other use of the idle capacity, accepting the special order would be the best choice for the manufacturer.

A Manufacturer Operating with Excess Capacity Has Been Asked to Fill