Question

XYZ Company just got a call for a large special order for their computer circuit boards.This company has requested a 20% discount since they will be ordering a large number at one time. The one issue is that they would like the circuit boards to be purple, rather than their typical green. This would require a special piece of equipment at a cost of $10,000 that may only be used once for this order. How should XYZ proceed?

A) They should take the order, as it is large and will product a larger amount of income.

B) They should not take the order as the special equipment may only be used once, so it is not a good investment.

C) They should evaluate their variable costs, space in their manufacturing facility and this additional fixed equipment cost and see if they will make a profit with the 20% discount.

Answer 1

The correct answer is C) They should evaluate their variable cost, space in their manufacturing facility and this additional fixed equipment cost and see if they will make a profit with the 20% discount.

Explanation

When ever we are evaluating special order, we should consider that it does not impact our present demand. We should prepare statement of cost benefit statement in which we should consider increased incremental revenue and cost, and drive that whether their is benefit in accepting the offer. We should consider only the relevant cost while evaluating the offer. If the benefit is positive, only than we should accept the offer.