Each month, Burrel Incorporated produces 500 units of a product that has unit variable costs of $22. Total fixed costs for the month are $4800. A special sales order is received for 200 units of the product at a price of $28 per unit. In deciding to accept or reject the special sales order, it is appropriate to consider the

Question

Nina Shannon

Business

23 May, 18:50

Each month, Burrel Incorporated produces 500 units of a product that has unit variable costs of $22. Total fixed costs for the month are $4800. A special sales order is received for 200 units of the product at a price of $28 per unit. In deciding to accept or reject the special sales order, it is appropriate to consider the

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difference between the offered price and the variable cost per unit

Explanation:

The contribution margin per unit of a product is the difference between the selling price per unit and variable cost per unit. The contribution margin per unit shows the amount available from each unit sold that cater to fixed costs and profits. A higher amount of contribution margin is desirable as it assures that each unit sold is contributing to profitability.

When the variable costs are more than the selling price, it means a business is not meeting any of its costs. The firm is running at a loss and is likely to close down soon. Before accepting or rejecting the special offer, the business should compare the proposed price and variable costs. If the contribution margin is positive, then the order should be considered.