Question

JPL Inc. makes a product that has a manufacturing cost of $2.75 per unit. ($1.75 per...

JPL Inc. makes a product that has a manufacturing cost of $2.75 per unit. ($1.75 per unit variable manufacturing and $1.00 per unit fixed manufacturing cost.). JPL has received a special order for 5,000 units of the product at $2.50 each. Marketing, administrative, and total fixed manufacturing costs will not be affected if the order is accepted, and it will not affect the regular market for the product. Which of the following statements regarding the special order is correct?

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Answer #1

As per the concepts related to Relevant costing, if there is a special order comes from outside market and will not affect the regular market for the product, then Special order should be accepted if price offered is atleast the variable cost (Cost to be incurred) in case of spare capacity.

In this case,

Cost to be incurred

Variable Cost (5,000 * 1.75) = $8,750

Sales Price (Price offered) = $12,500 (5,000 * 2.5)

Extra Contribution = $3,750

JPL Inc should accept the special order from the outside market, to contribute $3,750 to operating profit.

Now, choose from your available options.

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