Question

Minor Electric has received a special one-time order for 1,200 light fixtures (units) at $22 per unit. Minor currently produces and sells 6,000 units at $23.00 each. This level represents 75% of its capacity. Production costs for these units are $30.00 per unit, which includes $20.00 variable cost and $10.00 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $900 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $1,900 on the special order, the size of the order would need to be:

Answer 1

Note : In decision making of whether to accept speical order or not, only relevant cost(variable cost and new machine cost) is considered. Sunk cost(fixed cost) is not considered which would continue to occur irrespective we accept the order or not.

Therefore margin per unit = 22 - 20 = $ 2 per unit.

Size of order = (expected profit + New machine cost) / Contribution per unit

= (1900+900) / 2

= 1400 units

Therefore order must be of 1400 light fixtures (units) in order to earn profit of $ 1900.