Question

Minor Electric has received a special one-time order for 1,500 light fixtures (units) at $5 per unit. Minor currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3.00 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production. Should the company accept the special order?

A. No, because additional production would exceed capacity.
B. No, because incremental costs exceed incremental revenue.
C. No because incrementa conse o Yes, because incremental revenue exceeds incremental costs.
D. Yes, because incremental costs exceed incremental revenues.
E. No, because the incremental revenue is too low.

Answer 1

D. Yes, because incremental costs exceed incremental revenues.

Step-by-step explanation:

Given that

The Selling price of the order is $5

The Variable cost of manufacturing is $3

The Contribution per unit is $2

The Number of units is 1500

now

Total contribution

= 1500 × $2

= $3,000

Less: Machine costs ($1000)

Tota incremental revenue $2,000

As the incremental revenue is positive and exceeds the incremental cost so the special order can be accepted