Answer c.In order for us to draw a conclusion whether to accept the special order or not we need tocompare the contribution for each unit, as it will help us to determine that whether therecovery of the fixed cost will be possible or not.Contribution is the amount of money that has been left to recover the fixed cost incurredbecause of manufacturing. As fixed overhead does not change with the level of production,the same amount will be charged i.e. 540000. Therefore, we need to compare the contributionper unit and the calculations are shown below:Contribution perunitNormalSpecial orderSelling price per unit2.21.4Less: Direct material 0.390.39Direct labour 0.240.24Variable overhead 0.160.16Contribution perunit 1.410.61A company should not accept the special order if it takes its decision with respect torecovering the fixed overhead also. Let us now see, what the profit of the company is if it sells 20000 units of special order at 1.4as demanded and the remaining 740000 units at 2.2 which is normally done and then compareit with the profit if it sells the entire production at 2.2.Calculation of profit if the company sells all its 760000 units at 2.2 without accepting theorder:ParticularsAmountSales1672000Less: Direct material300000Direct labour 180000Variable overhead120000Fixed overhead540000Profit532000Calculation of profit if the company accepts the order:ParticularsAmountSales1656000
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