Parker Plumbing has received a special one-time order for 1,500 faucets (units)
ID: 2359182 • Letter: P
Question
Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker 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. Yes, because incremental revenue exceeds incremental costs. D. Yes, because incremental costs exceed incremental revenues. E. No, because the incremental revenue is too low.Explanation / Answer
C - 1,125 units. At a sell price of $5, variable cost of $3, means Contribution Margin of $2 per unit. To earn $1,250 after additional fixed cost of $1,000 requires a CM of $2,250 / $2 = 1,125 units. Proof - Selling 1,125 units at $5 means Sales of 5,625, VC of 3,375, for CM of 2,250 less FC of 1,000 = 1,250 net earnings.