When There Is Excess Capacity, It Makes Sense to Accept

question 157

Multiple Choice

When there is excess capacity, it makes sense to accept a one-time-only special order for less than the current selling price when:

• A)incremental revenues exceed incremental costs
• B)additional fixed costs must be incurred to accommodate the order
• C)the company placing the order is in the same market segment as your current customers
• D)it never makes sense

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Definitions:

Direct Materials

Raw materials that can be directly attributed to the production process of a product and are clearly identified as part of the finished product.

Manufacturing Overhead

All manufacturing costs that are not directly involved in the production process, such as maintenance, supervision, and utilities.

Operating Expenses

Costs related to the normal operations of a business, such as salaries, rent, and utilities, but excluding cost of goods sold.

Property Taxes

Taxes assessed on real estate by the government, typically based on the property's value.