Question 1: Special order

Sales volume in units	80
Revenue	$8,000
Variable costs	$2,400
Contribution margin	$5,600
Fixed costs	$1,600
Profit	$4,000

Special order: A client wants to buy 20 units at a discounted price of $40 per unit. This is a one-time deal (i.e., a short-term decision). You have enough spare capacity to fulfill this special order without cutting back on your regular sales.

a) Use the gross approach to decide whether you should take the special order:

	status quo (no special order)	total amounts after adding the special order
Revenue	$8,000
Variable costs	$2,400
Contribution margin	$5,600
Fixed costs	$1,600
Profit	$4,000

Should you take the special order? Why?

YES -- the profit is positive with the special order

NO -- the low price for the special order reduces the contribution margin

YES -- the profit is higher with the special order

b) Use the incremental approach to decide whether you should take the special order.

	how much each amount changes after adding the special order
Incremental revenue
Incremental variable costs
Incremental contribution margin
Incremental fixed costs
Incremental profit

Should you take the special order? Why?

YES -- the total profit is positive

YES -- the incremental profit is positive

NO -- the incremental profit is lower than the original profit