CIMA BA2 · Chapter 11 · Question 12 of 12
A company with spare capacity is offered a one-off order for 600 units at $22 each. Variable cost is $19 per unit, and a special tool costing $1,000 would have to be bought for the order and would have no further use. Normal fixed overheads, absorbed at $5 per unit, will not change. What is the effect on profit of accepting the order?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Profit increases by $800
Explanation
Incremental contribution = 600 x ($22 - $19) = $1,800. Less the specific tool cost of $1,000 = $800 increase in profit. The absorbed fixed overhead of $5 per unit is not relevant because total fixed overheads do not change.
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