Question

Gus Company has just obtained a request for a special order of 8,000 jigs to be shipped at the end of the month at a selling price of $9 each. The company has a production capacity of 90,000 jigs per month. At present, the company is producing and selling 85,000 jigs per month through regular channels at a selling price of $12 each. For these regular sales, the cost for one jig is:

           

            Variable production costs        $4.60

            Fixed production costs            1.70

            Variable selling expenses        1.40

Variable production costs and variable selling costs will remain the same on the special order units. There will be no change to total fixed costs. What would the selling price of the special order need to be in order for Gus Company to be economically indifferent between accepting and rejecting the special order?

Answer 1

Excess capacity available = 90000-85000 = 5000 jigs
Sales lost for accepting specail order = 8000-5000 = 3000 jigs
Regular selling price	12
Less: Variable production costs	4.6
Less: Variable selling expenses	1.4
Unit contribution margin	6
Total contribution margin lost	18000	=3000*6
Selling price of the special order:
Variable production costs	4.60
Variable selling expenses	1.40
Contribution margin lost per unit	2.25
Selling price of the special order	8.25
Selling price of the special order to be economically indifferent between accepting and rejecting the special order is $8.25