Hensely Company, which produces and sells a small digital clock, bases its pricing strategy on a 25 percent markup on the total cost. Based on annual production costs for 25,000 units of product, computations for the sales price per clock follow.

Unit-level costs $ 240,000

Fixed costs 60,000

Total cost (a) 300,000

Markup (a × 0.25) 75,000

Total sales (b) $ 375,000

Sales price per unit (b ÷ 25,000) $ 15

Required

Hensely has excess capacity and receives a special order for 8,000 clocks for $12 each. Calculate the contribution margin per unit. Based on this, should Hensely accept the special order?

Prepare a contribution margin income statement for the special order.

Contribution margin income statement for the special order-8,000

Sales (8,000× $12)                                                       96,000

Less Variable Costs ($ 240,000/25,000×8,000)     (76,800)

Contribution                                                                  19,200

Less Fixed Costs                                                               0

Net Income                                                                    19,200

The special order results in an incremental income of $19,200, therefore Hensely should accept the special order.

Explanation:

The Fixed Costs are irrelevant for this decision since Hensely has excess capacity and incurrs the expense whether or not the special order is accepted.

Contribution margin income statement for the special order-8,000

Sales (8,000× $12)                                                       96,000

Less Variable Costs ($ 240,000/25,000×8,000)     (76,800)

Contribution                                                                  19,200

Less Fixed Costs                                                               0

Net Income                                                                    19,200

The special order results in an incremental income of 19,200, therefore Hensely should accept the special order

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