Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market. The variable production cost is $5.00 per unit

Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market. The variable production cost is $5.00 per unit. An additional export tariff of 15% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated March 16, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

Answer:

Differential Analysis 

Reject Order (Alt. 1) or Accept Order (Alt. 2) 

March 16, 2014 

 

Reject 

Order 

(Alternative 1) 

Revenues, per unit $0.00 $7.20 $7.20 

Costs:    

Variable manufacturing costs, per unit 0.00 –5.00 –5.00 

Export tariff, per unit 0.00 –1.08* –1.08 

Income (Loss), per unit $0.00 $1.12 $1.12 

    

* $7.20 × 15% 

The company should accept the special order.