Question

Miley, Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price? When incremental revenues exceed incremental costs. Never. When additional fixed costs must be incurred to accommodate the order. When the company thinks it can use the cheaper materials without the customer’s knowledge.

Answer 1

When incremental revenues exceed incremental costs

Step-by-step explanation:

The Company should accept a special order only when the special order can make a contribution towards fixed costs. This contribution is determined by considering incremental revenues and incremental cost arising from the special order.

Answer 2

When incremental revenues exceed incremental costs.

Step-by-step explanation:

A business makes profit when the marginal revenue earned exceeds the marginal cost incurred in producing a product.

In this scenario it is possible to accept a special order for less than the current selling price.

With the reduced price the company can still make profit. However the reduction in marginal revenue should be calculated to ensure the company does not run at a loss.