A company has the capacity to produce 20,000 units of its product per year. It is currently only producing 13,000 units per year, with a sell price of $70 per unit. A customer has placed a special order for 6,500 units at $62 per unit. The incremental cost of accepting the special order is $382,000. Should the company accept the special order?

Question

Nikolai Montgomery

Business

30 December, 20:47

A company has the capacity to produce 20,000 units of its product per year. It is currently only producing 13,000 units per year, with a sell price of $70 per unit. A customer has placed a special order for 6,500 units at $62 per unit. The incremental cost of accepting the special order is $382,000. Should the company accept the special order?

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Owen Santana · Answer 1

The company should accept the special order.

Explanation:

The company has the capacity to produce 20,000 units and It is currently only producing 13,000 units.

The company can produce in addition of 7,000 units (more than the number of units from special order)

The revenue of special order: 6,500 x $62 = $403,000

Revenue of special order - Incremental cost of accepting the special order = $403,000 - $382,000 = $21,000 >0

The company gains $21,000 on special order = > The company should accept the special order.