Question :
A customer has offered you Rs. 15.00 per unit for 5,000 units of your product. You normally sell your product for Rs. 25.00 per unit. Should you accept this offer?
You currently produce and sell 40,000 units with a maximum capacity of 50,000 units. Total manufacturing costs are Rs. 18.00 per unit, consisting of Rs. 12.50 variable and Rs. 5.50 fixed.
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Solution:
Change in Revenues Rs. 75,000 (5,000 x Rs. 15.00)
Change in Expenses (62,500) (5,000 x Rs. 12.50)
Net Change Rs. 12,500
Conclusion: You should accept the special offer since it results in Rs. 12,500 of additional income.
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Doubt :
How is it possible?? While the same product can be sold at Rs. 25, then why should I select special offer by customers. Nevertheless, if we ignore fixed costs as a sunk cost we will be in loss too.
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