Question

A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product? Fixed factory overhead Contribution margin of additional units Variable selling expenses Direct labor

Answer 1

Fixed factory overhead

Step-by-step explanation:

The special request may involve in additional shipping or setup cost, so those even they are not listed, should be considered.

The variable selling expense may be zero if, the client request the goods directly from the company it may be no sales commission.

The CM of this additional units is relevant to know how much is left for special order cost.

Also, the special order may have a direfent sales price so the contribution needs to be recalculated.

Direct labor will be relevant, specially if this request inccurs in overtime cost.

The fixed cost are irrelevant. These cost already exist and the company is not operating at 100% so produce additional units will be a good idea. It will achiede a better use of the facilities.