Problem
Merv Marble, a salesperson for Widgets, Inc., received an order from a potential new customer for 50,000 units of Widgets' single product at a price $25 below its regular selling price of $65. Merv knows that Widgets has the capacity to produce this order without affecting regular sales. He has spoken to Wdigets' controller, Mia Joorgan, who has informed Merv that at the proposed selling price, Widgets will not be covering its variable costs of $42 for the product, so Mia recommends the order not be accepted. Merv knows that variable costs include his sales commission of $4 per unit. Marv says that If he accepts a $1 per unit commission, the sale will produce a positive contribution margin. Merv is eager to get the new customer because he believes that this could lead to the new customer becoming a regular customer.
Required:
1a. What is the contribution margin per unit when the product is sold at the regular price?
2a. Determine the TOTAL contribution margin on the special order as determined by the controller. Show all calculations.
2b. Determine the TOTAL contribution margin on the special order if Merv takes the lower commission. Show all calculations.
3. Do you recommend Widgets accept the special order? Explain why or why not.
4. Name two other things you'd like to know before making the final decision.