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Bennigan Battery Company is considering accepting a special order for 60,000batteries that it received from a discount retail store. The order specified a price of $4.00per unit, which reflects a discount of $1.20 per unit relative to the company's regular price of $5.20 per unit. Bennigan's accounting department has prepared the following analysis to show the cost savings resulting from additional sales:

	COST PER UNIT WITHOUT THE				COST PER UNIT WITH THE
COSTS	ADDITIONAL SALES (100,000 UNITS)				ADDITIONAL SALES (160,000 UNITS)
Variable		$3.60				$3.60
Fixed		1.50				0.94

No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduced from $5.10 to $4.54, Bennigan's president believes that a reduction in the price to $4.00 is justified for this order.

Requirements

(a)	Should the order for the 60,000 units at a price of $4.00 be accepted? What will be the impact on Bennigan's operating income?
(b)	Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest?
(c)	What other considerations are important in this case? Why?

Requirement a. Should the order for the

60,000

units at a price of

$4.00

be accepted? What will be the impact on

Bennigan's

operating income?

Begin by determining the contribution margin per unit for this order. (Use parentheses or minus sign to show a negative contribution margin per unit.)

Less:
Contribution margin per unit

Now determine the effect on

Bennigan's

operating income if it accepts this order.

First determine the formula then calculate the incremental profit or loss as a result of this order. (Complete all input cells. Enter a "0" for items with a zero balance. Use parentheses or minus sign to show a negative contribution margin or an incremental loss.)

				-		=	Incremental profit (loss)
				-		=

Should the order for the

60,000

units at a price of

$4.00

be accepted?

Bennigan's

accept the order for the

60,000

units at a price of

$4.00

because it's operating income will

increase

decrease

if it accepts this order.

Requirement b. Is the accounting department's analysis the best way to evaluate this decision? If not, what alternative method can you suggest?

Yes

No

, the accounting department's analysis

is

is not

the best way to evaluate this decision. Average unit costs

are the most accurate reflection of costs

can be misleading

. Fixed costs

are

are not

relevant to this decision. The decision should be based on

average

incremental

costs.

Requirement c. What other considerations are important in this case? Why?

Other considerations:	Why:

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