Question

Minor Electric has received a special one-time order for 600 light fixtures (units) at $8 per unit. Minor currently produces and sells 3,000 units at $9.00 each. This level represents 75% of its capacity. Production costs for these units are $9.00 per unit, which includes $6.00 variable cost and $3.00 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $550 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. If Minor wishes to earn $850 on the special order, the size of the order would need to be:

700 units.

75 units.

1,400 units.

2,800 units.

600 units.

Answer 1

Order Size = 700 units

Selling Price of Special order units = $ 8/unit

Variable Cost= $ 6/unit

Contribution per unit of special order = $ (8- 6) = $ 2/unit

Cost of new machine= $ 550

Required return= $ 850

New machine is required for producing special order units and the machine does not have any salvage value. Therefore the company needs to recover the cost of machine from the sale of special order units. Hence it is a fixed cost.

The size of special order to earn $ 850 can be found as follows:

Required Profit	$ 850
Add: Fixed Cost(Cost of machine)	$ 550
Total Contribution required	$ 1400
Contribution per unit	$ 2
Number of units ($1400/ $2)	700 units