Question

Campbell Corporation makes and sells state-of-the-art electronics products. One of its segments produces The Math Machine, an inexpensive calculator. The company’s chief accountant recently prepared the following income statement showing annual revenues and expenses associated with the segment’s operating activities. The relevant range for the production and sale of the calculators is between 35,000 and 68,000 units per year.

Revenue (34,000 units × $9) $306,000
Unit-level variable costs
Materials cost (34,000 × $2) (68,000)
Labor cost (34,000 × $1) (34,000)
Manufacturing overhead (34,000 × $0.20) (6,800)
Shipping and handling (34,000 × $0.28) (9,520)
Sales commissions (34,000 × $1) (34,000)
Contribution margin 153,680
Fixed expenses
Advertising costs (29,000)
Salary of production supervisor (66,000)
Allocated companywide facility-level expenses (83,000)
Net loss $(24,320)

Required:
A large discount store has approached the owner of Lang about buying 7,000 calculators. It would replace The Math Machine’s label with its own logo to avoid affecting Lang’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 $5.60 per calculator. Calculate the contribution margin from the special order.

Answer 1

$14,840

Step-by-step explanation:

When deciding on accepting special order, consider only relevant costs and revenues.

Relevant costs and revenues are those items that would change as a result of the decision.

Since there is spare capacity and the fixed costs are already incurred, these will be irrelevant for this decision

Contribution margin from the special order.

Sales (7,000 x $5.60) $39,200

Less Variable Costs :

Materials cost (7,000 x $2) $14,000

Labor cost (7,000 x $1) $7,000

Manufacturing overhead (7,000 x $0.20) $1,400

Shipping and handling (7,000 x $0.28) $1,960 ($24,360)

Contribution Margin $14,840

Note : Sales commissions have been ignored from this calculation since they will no longer be needed.

Conclusion:

the contribution margin from the special order is $14,840.