Question

Gibson Company, which produces and sells a small digital clock, bases its pricing strategy on a 25 percent markup on total cost. Based on annual production costs for 12,000 units of product, computations for the sales price per clock follow: Unit-level costs $ 276,000 Fixed costs 60,000 Total cost (a) 336,000 Markup (a × 0.25) 84,000 Total sales (b) $ 420,000 Sales price per unit (b ÷ 12,000) $ 35 Required Gibson has excess capacity and receives a special order for 7,000 clocks for $28 each. Calculate the contribution margin per unit. Based on this, should Gibson accept the special order? Prepare a contribution margin income statement for the special order.

Answer 1

a) Contribution margin per unit $5

b)

Decision:

Gibson should accept the special order because doing so would increase its income by $35,000

Step-by-step explanation:

To determine whether or not GIbson should be accept the order, we compare the variable cost of the order to the sales value . If the special order generates a positive contribution margin, then it should be accepted.'

The relevant cash flows to be considered here includes

1. Variable cost of the special order

2. Sales revenue from the special order.

Note that the fixed cost are general unavoidable costs which would be incurred either way. And therefore should not be considered .

Variable cost of a unit = total variable cost/ units product.

Unit variable cost = 276,000/ 12,000 = $23

Contribution margin per unit = selling price - unit variable cost

= $28 - $23

= $5

Total contribution = contribution margin × units

Total contribution = $5 × 7,000 = $35,000

b) Decision:

Gibson should accept the special order because doing so would increase its income by $35,000