At Bargain Electronics, it costs $31 per unit ($20 variable and $11 fixed) to make an MP3 player at full capacity that normally sells for $49. A foreign wholesaler offers to buy 3,720 units at $28 each. Bargain Electronics will incur special shipping costs of $3 per unit. Assuming that Bargain Electronics has excess operating capacity, indicate the net income (loss) Bargain Electronics would realize by accepting the special order. The special order should be?

Question

Gerald Knapp

Business

7 May, 23:32

At Bargain Electronics, it costs $31 per unit ($20 variable and $11 fixed) to make an MP3 player at full capacity that normally sells for $49. A foreign wholesaler offers to buy 3,720 units at $28 each. Bargain Electronics will incur special shipping costs of $3 per unit. Assuming that Bargain Electronics has excess operating capacity, indicate the net income (loss) Bargain Electronics would realize by accepting the special order. The special order should be?

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Catherine Buckley · Answer 1

Contribution from special order $18,600

Explanation:

The relevant cash flows associated with the special order decision include:

Sales revenue from special order Variable cost from special order

Unit variable cost = variable manufacturing cost + shipping cost = 20+3 = 23.

Note that the shipping cost is directly associated with the special order while the fixed cost is irrelevant. That is, whether or the special order is accepted the fixed cost would still be incurred.

So the analysis would look like this:

$

Sales revenue from special order (3,720 * 28) = 104,160

Variable cost of order (3,720 * 23) = (85560)

Contribution from special order 18,600