Question

Accept Business at Special Price

Product A is normally sold for $48 per unit. A special price of $32 is offered for the export market. The variable production cost is $25 per unit. An additional export tariff of 12% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order.

a. Prepare a differential analysis dated March 16 on whether to reject (Alternative 1) or accept (Alternative 2) the special order. If required, round your answers to two decimal places. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

Differential Analysis
Reject Order (Alt. 1) or Accept Order (Alt. 2)
March 16
	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
Revenues, per unit	$	$	$
Costs:
Variable manufacturing costs, per unit
Export tariff, per unit
Income (Loss), per unit	$	$	$

b. Should the special order be rejected (Alternative 1) or accepted (Alternative 2)?

Answer 1

a.

In case of rejection of order, all amounts should be reflected as 0.

Export tariff = Revenue (special order) × Rate

                        = $32 × 12%

                        = $3.84

b.

The special order should be accepted, since it creates differential income but not loss.