Question

Emma Company received a special order for 7,460 units at a discounted price of $56 each. The product normally sells at $71 and has the following costs per unit:

Direct materials: $10
Direct labor: $15
Variable manufacturing overhead: $5
Fixed manufacturing overhead: $10
Required:
Calculate the variable cost per unit.
Calculate the contribution margin per unit for the special order.
Determine whether the company should accept the special order.

Answer 1

The variable cost per unit is $30. The contribution margin per unit for the special order is $26. The company should accept the special order if the contribution margin per unit is greater than the fixed costs.

Step-by-step explanation:

To calculate the variable cost per unit, we add the cost of direct materials, direct labor, and variable manufacturing overhead. In this case, the variable cost per unit is $10 + $15 + $5 = $30.

The contribution margin per unit for the special order can be calculated by subtracting the variable cost per unit from the discounted price. In this case, it is $56 - $30 = $26.

To determine whether the company should accept the special order, we need to compare the contribution margin per unit to the fixed costs. If the contribution margin per unit is greater than the fixed costs, then the company should accept the special order. Otherwise, it should decline the order.