Question

Martin Company incurred the following costs for 70,000 units:

Variable costs $420,000

Fixed costs   392,000

Martin has received a special order from a foreign company for 3,000 units at $8.4 per unit. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6,300 for shipping.

Required:

1. Should Martin Company accept this special order? Show your analysis (5 points)

Answer 1

• Requirement [a]

The special order SHOULD BE ACCEPTED ‘if’ the contribution margin earned from it EXCEEDS the additional fixed expenses on that special order.
Otherwise, it should not be accepted.

--ANALYSIS: Working to find out if the special order’s contribution margin EXCEEDS the fixed expenses:

A	Offer price per unit	$8.40
B	Variable cost per unit [$420000 / 70000 units]	$6.00
C = A - B	Contribution margin per unit	$2.40
D	No. of units in order	3000
E = C x D	Total contribution margin from special order	$7,200
F	Additional fixed expense on special order	$6,300
G = E - F	Net Income (Loss) from special order	$900

• Answer
  YES, the special order SHOULD be ACCEPTED, as it will lead to additional net income of $ 900