Page 31 - Managerial Accounting-MGT 145

Module 5: Differential Analysis
Special Order Without Excess Capacity Case 2.0

Assume that the company normally manufactures and sells
9,000 units. Should the company accept the special order?

Solution:
Since the company has excess capacity of 1,000 units only, it
is not enough to fill up the special order of 1,500 units. Hence, a
portion of the regular sales (500 units) must be sacrificed to
fill up the entire special order. The lost contribution margin
should be considered. Contribution margin is equal to sales
(P20) minus variable costs (P10 var manufacturing plus P1
var operating cost = P11).

Lost contribution margin = (P20 - P11) x 500 units = P4,500

The lost contribution margin is allocated over the items sold
through the special order.

Lost Contribution Margin per unit = P4,500 / 1,500 units = P3

This cost is an additional consideration in the decision. Should
the company accept the offer?

The answer is still yes since the selling price (P15) is higher
than the cost (P13, i.e. variable manufacturing cost per unit of
P10 plus lost CM per unit of P3). This will result in additional
income of P3,000 (1,500 units x P2).