Home › ACCA › Management Accounting › Differential Analysis › A special order is priced at $36 per unit while …
A special order is priced at $36 per unit while variable manufacturing cost is $25 per unit and fixed manufacturing cost is $15 per unit. Why is the $15 left out of the analysis?
AIt is incurred whether the order is taken or not
BIt is recovered in the regular selling price of $60
CIt is a sunk cost already paid in an earlier year
DIt is charged to the wholesaler under the contract
Answer & Solution
Correct answer: A. It is incurred whether the order is taken or not
1. The company has spare capacity, so the order needs no extra fixed spending.
2. Fixed manufacturing cost of $15 per unit is incurred whether the order is accepted or rejected.
3. Amounts that do not change between the alternatives are excluded from a differential analysis.
4. Comparing $36 with the full $40 of variable plus fixed cost would wrongly reject a profitable order.
5. A sunk cost is past spending, whereas this fixed cost is still to be incurred either way.
_Source: Jonick, Principles of Managerial Accounting (UNG Press, CC BY-SA 4.0), section 9.7 Accept Business at Reduced Price_
Related questions
Alongside the numbers, what else should a differential analysis take into account?What limits the usefulness of the average rate of return and cash payback methods?Asset 1 has discounted cash flows of $108,724 over four years and Asset 2 has $107,733 oncOne proposed asset gives cash flows for four years and a rival gives cash flows for six yeAsset 1 costs $100,000 and has discounted cash flows of $121,526. Asset 2 costs $140,000 aThe present value of the future net cash flows from an asset is $118,016 and the asset cosEquipment costs $100,000 and gives net cash flows of $24,000 a year for six years. The preWhat is the future value of $1.00 in three years at an interest rate of 6%?