Question

Vincennes Co. receives an order for one of its products. The order demands a 10% discount from the standard price, but would be for a sizable volume: 10,000 units. Vincennes typically sells the product for $20 per unit and incurs production costs of $400,000 fixed and $700,000 variable for the 80,000 units it produces in an average month. In addition, Vincennes incurs $1,200,000 in fixed marketing and administration costs. Vincennes’ factory is currently operating at full capacity. Should Vincennes accept the special order? Provide proof of your answer.

Answer 1

>> Vincennes should not accept the special order.

>> Vincennes is already operating at full capacity if it accepts special order company should lose opportunity cost.

>> Variable cost per unit = $ 700,000 / 80,000 = $ 8.75.

>> Oppertunity cost = Sales - Variable cost = $ 20 - $ 8.75 = 11.25.

>> If accept the special order oppertunity cost also considered.

>> Net income / ( Loss) if special order accepted = ( $ 20 *90 % ) - $ 11.25 - $ 8.75 = ( $ 2 ).

>> There will be loss of $ 20,000 ( 10,000 * $ 2 ) if company accept the Special order.