contribution margin
7. General Medical makes disposable syringes for hospitals
and doctor supply companies. The company uses cost-plus pricing and currently
charges 150 percent of average variable costs. General Medical learned of an
opportunity to sell 300,000 syringes to the Department of Defense if they can
be delivered within three months at a price not in excess of $1 each. General
Medical normally sells its syringes for $1.20 each.
If General Medical accepts the Defense Department order, it
will have to forgo sales of 100,000 syringes to its regular customer over this
time period, although this loss of sales is not expected to affect future
sales.
a. Should General Medical accept the Defense Department
order?
b. If sales for the balance of the year are expected to be
50,000 units less because of some lost customers who do not return, should the
order be accepted? (Ignore any effects beyond one year.)
