Pretty Dolls Pty Ltd Usually Sell 30,000 Dolls Per Annum

question 30

Multiple Choice

Pretty Dolls Pty Ltd usually sell 30,000 dolls per annum. This year, they have excess stock of 10,000 dolls; they usually retail the dolls at $35 per unit. Their variable cost per unit is $20 and their annual fixed costs are $30,000. They have received 'a one time only expression of interest' from an overseas retail chain to purchase 7,500 units at $29 per unit. What would be the best advice you could provide to Pretty Dolls?

• A)Do not accept the order, as it is not worthwhile pursuing 'a one time only expression of interest.'
• B)Do not accept the offer, as a loss will be incurred.
• C)Do not accept the order, as the variable cost plus the fixed costs per unit amount to $30 per unit.
• D)Accept the offer, as it will lead to a $9 per unit contribution to fixed costs.

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Definitions:

Residual Claim

The right of common stockholders to claim assets remaining after debts and liabilities have been settled in a liquidation event.

Stockholders' Right

Entitlements or privileges afforded to shareholders, including the right to vote on corporate matters, receive dividends, and share in the distribution of assets upon liquidation.

Dividends

Payments made by a corporation to its shareholder members, typically from profits or reserves.

Retained Earnings

The portion of net income left over after dividends are paid to shareholders, reinvested in the business or used to pay off debt.