Question

A large discount store has approached the owner of Vernon about buying 7,000 calculators. It would replace the math machine's label with its own logo to avoid affecting Vernon's existing customers. Because the offer was made directly to the owner, no sales commissions on the transaction would be involved, but the discount store is willing to pay only $4.20 per calculator. Calculate the contribution margin from the special order. Based on quantitative factors alone, should Vernon accept the special order?

Answer 1

Without knowing Vernon's variable costs, we cannot calculate the exact contribution margin. If the variable cost is less than $4.20 per unit, Vernon should accept the offer, as it would add to profit.

Step-by-step explanation:

The subject question involves calculating the contribution margin for a special order and deciding whether to accept the order based on quantitative factors alone. The contribution margin is calculated by subtracting variable costs from the sales price. We are not provided with the variable costs of Vernon's calculators, so the exact contribution margin cannot be calculated without additional information.

However, if the variable cost per unit is less than the offered price of $4.20, Vernon would increase its profits by accepting the order, as the contribution margin per unit would be positive. Since there are no sales commissions involved, all the revenue from the special order would contribute to covering fixed costs and adding to the profit.

No further information is given about Vernon's production capacity or other potential costs associated with the order, so if we assume the company has the capacity and there are no additional costs, and if the variable cost per unit is less than $4.20, then Vernon should accept the special order based on quantitative factors alone.