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 incremental cost per unit for the special order is $7.50 ($2 direct materials + $4 direct labor + $1.50 variable overhead), which is less than the special order price of $10 per unit. Therefore, accepting the special order would result in an incremental profit of $2.50 per unit, not a loss. Fixed costs are not affected by the order since the company is operating below capacity.

A Company Normally Sells a Product for $20 Per Unit