Question

VideoSecu produces wall mounts for flat panel television sets. Assume the forecasted income statement for next year is as follows:

VideoSecu Budgeted Income Statement For the Year
Sales ($28 per unit)	$5,600,000
Cost of good sold ($19 per unit)	(3,800,000)
Gross profit	1,800,000
Selling expenses ($5 per unit)	(1,000,000)
Net income	$800,000

Additional Information
(1) Of the production costs and selling expenses, $1,520,000 and $750,000, respectively, are fixed.

(2) VideoSecu received a special order from a hospital supply company offering to buy 10,000 wall mounts for $15. If it accepts the order, there will be no additional selling expenses, and there is currently sufficient excess capacity to fill the order. The company's sales manager argues for rejecting the order because "we are not in the business of paying $19 to make a product to sell for $15."

Do you think the company should accept the special order?

Compute the contribution per unit and total contribution for the special order.

Contribution per unit. Note: Round answer to two decimal places.

Answer 1

Since there is spare capacity, no additional fixed cost will be incurred on the special order.

Variable cost per unit = (Cost of goods sold – fixed costs)/Number of units

= (3,800,000-1,520,000)/200,000

= $11.4 per unit

Yes, the company should accept as the sale price is higher than the relevant cost

Contribution per unit = Selling price per unit – Variable cost per unit

= $15 – 11.4

= $3.60 per unit

Total contribution for special order = 3.60*10,000

= $36,000