Asked by Emanuela Tigistu on May 12, 2024
Verified
De Longo Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?
A) Never
B) When additional fixed costs must be incurred to accommodate the order
C) When the company thinks it can use the cheaper materials without the customer's knowledge
D) When incremental revenues exceed incremental costs
Excess Capacity
The amount by which the actual production capabilities of a company exceed the current demand for its products or services.
Special Order
A one-time order that is not part of the company's usual ongoing operations, often requiring special pricing or terms.
Incremental Revenues
Additional income generated from a new action or decision, above and beyond the existing baseline revenue.
- Master the conditions for making decisions on special orders, highlighting the roles of capacity and additional financial implications.
Verified Answer
AA
Austin AdamsMay 17, 2024
Final Answer :
D
Explanation :
When incremental revenues (i.e. revenues from the special order) exceed incremental costs (i.e. costs incurred for the special order), accepting the order would result in a positive contribution margin and increase overall profitability, even if the sale price is less than the current selling price. Therefore, the company should accept the special order.
Learning Objectives
- Master the conditions for making decisions on special orders, highlighting the roles of capacity and additional financial implications.