You sell high-quality fake IDs to college students at a regular price of $100.

| March 29, 2017

Question
You sell high-quality fake IDs to college students at a regular price of $100. Your financial results for 2009 are summarized in the following contribution margin statement:

2009
Sales volume (#units) 80
Revenue $8,000
Variable costs $2,000
Contribution margin $6,000
Fixed costs $1,300
Profit $4,700
Special order: You have been approached by a client who wants to buy30units at a discounted price of $40per unit. You have enough spare capacity to fulfill this special order without cutting back on your regular business (80units at $100).

Required:

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

1. Compute total profit with the special order (total for the regular business plus the special order). To do that, compute total revenue, costs, etc with special order:

Total revenue=$

Total VC=$

Total CM=$

Total FC=$

Profit = $

2. Make a decision based on total profits with and without the special order. Should you take this special order?

(enter 1 if yes, 2 if no)

b) Use the incremental approach to decide whether you should fulfill this special order:

1. Compute the incremental profit, i.e., thechangein profits relative to the status quo (status quo = no special order). To do that, computeincrementalrevenue (change in revenue), incremental variable costs, etc:

Incremental revenue=$

Incremental VC=$

Incremental CM=$

Incremental FC=$

Incremental profit = $

2. Make a decision based on incremental profits. Should you take this special order?

(enter 1 if yes, 2 if no)

c) If you reached different conclusions in (a) and (b), explain why they are different. If you reached the same conclusions in (a) and (b), also explain why, and whether it is a coincidence or a general pattern.

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