Todd makes candles which normally sells at €15 (Euros) per unit. Normal producti

Question

Todd makes candles which normally sells at €15 (Euros) per unit. Normal production volume is 15,000 ounces per month. Average cost is €7 per ounce, of which €3 is direct material and €2 is variable conversion cost. This product is seasonal. After July, demand for this product drops to 12,000 ounces monthly. In November, Allie offers to buy 2,000 ounces for €14,000. If Todd accepts the order, she must design new boxes at a cost of €3,100. Each box will cost 50 cents to make and apply.

a. Should Todd take the order?

b. What is the gain or loss?

Explanation / Answer

Variable cost per ounce = 3 + 2 = 5

Fixed cost per ounce = 7 -5 = 2

Variable cost incurred = 2000 * 5 = 10000

Special box cost = 3100

Revenue from order = 14000

Net gain from order = 14000 - 10000 - 3100 = 900

Hence the order must be accepted

Please note that fixed costs are irrelevant for decision making

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