ICAEW BIP · Chapter 12 · Question 7 of 7
Ashby Ltd has spare capacity. A customer offers to buy 2,000 units of a product at £21 each as a one-off order that will not affect other sales. The variable cost is £17 per unit and fixed production overhead is absorbed at £6 per unit; total fixed overheads will not change. Special packaging costing £1,500 in total would be needed for the order. What is the effect on profit of accepting the order?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) An increase of £6,500
Explanation
Only incremental cash flows are relevant. Extra contribution = 2,000 x (£21 - £17) = £8,000. Less the specific packaging cost of £1,500 gives an increase in profit of £6,500. The absorbed fixed overhead of £6 per unit is not relevant because total fixed costs do not change; using full cost of £23 gives the wrong answer of a £5,500 decrease.
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