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Genis Battery Company is considering accepting a special order for 50,000 batteries that it received from a discount retail store

Genis Battery Company is considering accepting a special order for 50,000 batteries that it received from a discount retail store
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ACCOUNTING

5-45 Incremental revenues and costs, special order
Genis Battery Company is considering accepting a special order for 50,000 batteries that it received from a discount retail store. The order specified a price of $4 per unit, which reflects a discount of $0.50 per unit relative to the company’s regular price of $4.50 per unit. Genis’s accounting department has prepared the following analysis to show the cost savings resulting from additional sales:

Cost Per Unit Without Cost per unit with
The Additional Sales Additional Sales
Costs (100,000 units) (150,000 units)
Variable $3.30 $3.30
Fixed $4.20 $3.90

No additional fixed costs will be incurred for this order because the company has surplus capacity. Because the average cost per unit will be reduced from $4.20 to $3.90, Genis’s president believes that a reduction in the price to $4 is justified for this order.

a. Should the order for the 50,000 units at a price of $4 be accepted? What will be the impact on Genis’s operating income?
b. Is the accounting department’s analysis the best way to evaluate this decision? If not, what alternative method can you suggest?
c. What other considerations are important in this case? Why?

 

FILE: MS WORD

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