Accept Business at Special Price Product R is normally sold for $52 per unit. A

Question

Accept Business at Special Price Product R is normally sold for $52 per unit. A special price of $39 is offered for the export market. The variable production cost is $31 per unit An additional export tariff of 25% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Hint(s) (H Hide Prepare a differential analysis dated October 23, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order. Round your answers to two decimal places (e.g., 23.72, 25.00). If a amount is zero, enter zero "0 Differential Analysi Reject order (Alt. 1 or Acceptorder (Alt 2) October 23, 2014 Reject order (Alternative 1 Accept Order (Alternative 2 Differential Effect on Income (Alternative 2 5 Revenues, per unit Costs: variable manufacturing costs, per unit Export tariff, per unit Income (Loss), per unit

Explanation / Answer

It is a problem on export order. Firm has already some domestic order. It can be sold at $52 per unit. It has $31 variable cost. Thus profit per unit is $52 - $31=$21.

Now it has some extra capacity. It can be produced to supply an export order. But export order sale price is $39 per unit. Still there is a profit considering variable cost of $31. Now profit is $39-$31=$8. But it has to pay 25% tariff on revenue. So tariff paid per unit is $39 x 25% = $9.75. If tariff is considered then instead of any positive contribution, export order will give us a loss of $9.75-$8=$1.75 per unit. Thus it is not justified to accept the order.

This situation is sjown here by the understated differential table.

Differential analysis Reject order (alt 1) or Accept order (alt 2) October 23,2014 Reject order Accept order Differential effect on income (alt 2.) (Alternative 1) (alternative 2) Revenue per unit $52 $39 ($13) Costs: Variable cost $31 $31 $0.00 Export tariff per unit $9.75 $9.75 Income/(loss) per unit $21 ($2) ($23)

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