Exam IIA-CIA-Part3 topic 2 question 6 discussion

Actual exam question from IIA's IIA-CIA-Part3

Question #: 6
Topic #: 2

A large retail customer made an offer to buy 10,000 units at a special price of $7 per unit. The manufacturer usually sells each unit for $10. Variable manufacturing costs are $5 per unit and fixed manufacturing costs are $3 per unit. For the manufacturer to accept the offer, which of the following assumptions needs to be true?

A. Fixed and variable manufacturing costs are less than the special offer selling price.
B. The manufacturer can fulfill the order without expanding the capacities of the production facilities.
C. Costs related to accepting this offer can be absorbed through the sale of other products.
D. The manufacturer's production facilities are currently operating at full capacity.

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Suggested Answer: C 🗳️

by luluka at Sept. 18, 2021, 3:53 p.m.

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Kozy

4 days, 23 hours ago

Selected Answer: B

This is a classic special order decision problem from managerial accounting. The key is to determine whether the incremental revenue exceeds the incremental costs. Special offer price = $7 Variable cost per unit = $5 Fixed costs = $3 → Not relevant if they won’t change due to the order. Profit per unit from the special order = $7 - $5 = $2 → Positive incremental contribution margin ➡️ Fixed costs are sunk in this decision unless the order requires expanding capacity (which would increase fixed costs). So, if the manufacturer has capacity to take on this order without extra fixed costs, then it’s profitable.

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luluka

2 years, 10 months ago

isnt'it B?

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