Each month Perry Company produces 9000 units of a product th

Each month Perry Company produces 9,000 units of a product that has variable costs of $12 per unit. Total fixed costs for the month are $36,000. A special order is received which is for 1,000 units at a price of $13 per unit. Relevant to the decision of whether to accept or reject this special order is the:
a. Old fixed cost per unit of $4.00

b. New fixed cost per unit of $3.60
c. Difference between the offered price and the variable cost per unit (i.e., $1.00) d. Difference between the two fixed costs per unit (i.e., $0.40)

Solution

The correct alternative is C which is difference between offered price and variable cost per unit( i.e. $1.00) The other three alternative does not hold true as fixed cost is irrelevent in determining whether to accept the special order or not. The reason behind this is fixed cost are already getting absorbed by existing production. So, now, anything received in excess of variable cost will increase the operating profit. Hence, the difference between offered price and variable cost per unit is the only relevent to decision making in such situation