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ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to produce...

Question:

ABC Toys manufactures and sells wooden toys for $15 each. The company has the capacity to produce $25,000 toys in a year but is currently produces and sells $20,000 toys per year. The company currently incurs the following costs at its current production level of $20,000 toys:

Variable manufacturing costs$70,000
Fixed manufacturing costs$90,000
Variable selling and administrative costs$75,000
Fixed selling and administrative costs$50,000

A retailer is interested in purchasing the excess capacity of $5,000 toys if it can receive a special price. This special order would not affect ABC Toys' regular sales or its cost structure. ABC Toys' profits would increase from this special order if the special order price per toy is greater than:

a. $7.25

b. $5.80

c. $8.00

d. $14.25

Contribution Margin:

In accounting, contribution margin refers to the sales minus variable cost. It shows the amount that is left after deducting the variable expenses to cover the fixed cost and profit.

Answer and Explanation: 1

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Solution:

Variable Mfg. Cost $70,000
Add: Variable Selling Cost 75,000
Total Cost $145,000
Total Cost produced by Contribution Margin $145,000/...

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Contribution Margin: Definition & Formula

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Chapter 22 / Lesson 20
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Understand what the contribution margin is. Learn the definition of contribution margin and understand its importance in business. Discover how to calculate it through examples.


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