Problem
Relevant Costing Ethics Challenge
A salesperson received an order from a potential new customer for 50,000 units of a single product at a price $25 below its regular selling price of $65. The salesperson knows that the company has the capacity to produce this order without affecting regular sales.
The salesperson has spoken to the controller who has informed the salesperson that at the $40 selling price the company will NOT be covering its variable costs of $42 for the product, and the controller recommends the order not be accepted.
The salesperson knows that variable costs include their sales commission of $4 per unit. If the salesperson accepts a $2 per unit commission, the sale will produce a contribution margin of zero.
The sales person is eager to get the new customer because they believe that this could lead to the new customer becoming a regular customer.
Prompt:
A. Determine the contribution margin per unit on the order as determined by the controller.
B. Determine the contribution margin per unit on the order as determined by the salesperson if they take the "lower" commission.
C. What factors would you consider before recommending the Company accept the special order?
D. Do you recommend the company accept this order? Why?