Now the application of cost accounting system came into practices for the fact that that the firm had to come up with a decision i.e. whether to accept this order or otherwise, since bulk orders go for discounted prices, but the exceptional quantity makes the fixed cost distribute over larger volumes.
Number cracking leads to the conclusion that the contribution margin and operating profits from lemon cookies are lesser when compared to the real mint ones. So the suggestion came out was to reduce the volume of lemon ones and increase those of real mint, as it would also accommodate the order.
In realistic terms, the application should be otherwise, since the unit contribution margin for lemon cookies is on the higher side. At the same time, any order cannot be accepted at a point in time when production capacity is already on maximum utilization point, since it implies the inability of the firm to cater to the order. Along the similar line, the order should not also be considered because the selling price per unit for the bulk order is the one at which contribution margin is less than the fixed costs incurred so it makes less sense to accept the order under such a circumstance despite the fact that the contribution margin would yet be greater than zero, but would result in a loss for the business. ...Show more