BCD Inc sells its products for $12 each. The company's volume has remained unchanged for some time at 10,000 units per month although it has spare capacity. Production costs are $10 per unit including fixed costs which average $3 per unit for the production volume. A customer has requested a special order of 2,000 of BCD's products at a special price of $9.
What should BCD do?
Decision making related to special order is done based on the relevant costing and spare capacity available with a company. If the company has a spare capacity then, the minimum price for accepting special orders would be the marginal cost of production.
Answer and Explanation:
BCD should accept the offer.
Explanation: BCD should accept the offer as it would bring the additional income of $4,000 ($2 x 2,000) which has been computed by multiplying the difference between the special order price and the per-unit variable production cost with the special order units.
Note 1: Relevant cost per unit for special order is $7 ($10 - $3), which has been computed by deducting the per-unit fixed cost from the per-unit total production cost.
Note 2: Per unit margin on special order is $2 ($9 - $7).
Note 3: Fixed cost is irrelevant for decision making.
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from Accounting 301: Applied Managerial AccountingChapter 9 / Lesson 12