Paragon Products Sells a Special Kind of Navigation Equipment for $1

question 27

Multiple Choice

Paragon Products sells a special kind of navigation equipment for $1 200. Variable costs are $900 per unit. When a special order arrived from a foreign contractor to buy 40 units at a reduced price of $1 000 per unit, there was a discussion among management. The controller said that as long as the special price was less than the variable costs, the sale would contribute to the company's profits, and so it should be accepted as offered. The production manager warned that the company was already working at full capacity, and would have to add staff and equipment to accommodate the order. The sales manager urged caution because if they sold to this contractor, it might adversely affect their regular sales. The vice- president decided to decline the order. Which of the following statements is NOT valid for sound business decision making?

• A)The sales manager was right because even if this sale generated profit, it may cut into future profits by reducing future sales.
• B)The vice- president was wise to be cautious given the concerns about capacity and the effect on regular sales.
• C)The production manager was correct because the incremental fixed costs of expanding capacity could negate the positive contribution margin of the sale.
• D)The controller was correct in that the only relevant facts are the special sales price and the incremental variable costs.