Question 11.5: Cottage Industries Ltd (Example 11.2, page 542) has spare ca...
Cottage Industries Ltd (Example 11.2, page 542) has spare capacity: it has spare basket-makers. An overseas retail chin has an order for 300 baskets at a price of $81 each. Without considering any wider issues, should the business accept the order?
Since the fixed costs will be incurred in any case, they are not relevant to this decision. All we need to do is to see whether the price offered will yield a contribution. If it will, the business will be better off by accepting the contract than by refusing it. We Know that the variable costs per basket total $72; thus, each basket will yield a contribution of $9 (i.e. $81 – 72): $2,700 in all. Whatever else may be happening to the business, it will be $2,700 better off by taking this contract than by refusing it.