Final answer:
Miley Inc. should consider accepting a special order priced lower than the standard selling price if the price covers variable costs, contributes to fixed costs without incurring per unit losses, and utilizes excess capacity productively.
Step-by-step explanation:
Miley Inc., with excess capacity, should consider accepting a special order priced lower than the current selling price if it covers fixed costs and does not lead to a loss on every unit sold. Since the company has excess capacity, accepting the special order can utilize idle capacity without incurring additional fixed costs, as long as the price covers variable costs.
Accept the special order if it covers all variable costs and contributes to fixed costs without incurring losses on each unit sold.
When discussing whether a company should accept a special order at a price below its standard selling price, several factors come into play. A crucial aspect to consider is whether the lower price will cover the variable costs of production and contribute towards the fixed costs. For Miley Inc., this means that the special order should not result in a loss per unit; it should at least break even on the variable costs. It's important to recognize that when a company operates with excess capacity, accepting additional work can be beneficial as long as it doesn't exacerbate losses and it helps in absorbing some of the fixed costs, thus potentially improving overall financial performance.
Key considerations include whether the incremental revenues from the special order exceed its incremental costs, ensuring that total revenue will increase. However, it's essential to avoid scenarios where total costs are consistently higher than total revenues, as this would lead to losses. Profit optimization involves producing quantities where total revenue is as close as possible to total costs, minimizing losses where necessary.