Question

Alex Company produces a single product. The cost of producing and selling a single unit of this product at the company's normal activity level of 70,000 units per month is $50 variable cost and $16 fixed cost. Alex Company is currently producing and selling only 69,000 units at selling price $80 per unit. An order has been received from an overseas customer for 1,500 units to be delivered this month at price $65 per unit. If the special offer is accepted, the contribution margin lost of normal sales is:

Select one:

a. $15,000

b. Zero

c. $45,000

d. $22,500

Answer 1

Since we have capacity of 70,000 and we sell produce to sell 69,000 units outside, there would no contribution lost in producing additional 1000 units. But the additional 500 units (ie.m 1500-1000) we will have to forego contribution from normal sales.

So, contribution per unit from normal sales is:

Selling Price	80
Less: Variable Costs	50
Contribution per unit	30

So, Contribution lost in 500 units => 30*500 = $ 15,000.

Hence Option A is correct.