Ariel Cupcakes make cupcakes for special occasions. They charge $5 per cupcake. They've received a request for a special order for 232 cupcakes at a price of $5 each. The costs to produce a single cupcake are:

Direct materials of $2.23
Direct labour of $1.95
Packaging of $1
Fixed costs of $3,764 for factory rent and equipment

What is the impact on Ariel Cupcakes' profit of accepting the special order? Please answer to 2 decimal places. If accepting the order will generate a loss, be sure to add a minus/negative before your answer.

Question

Ariel Cupcakes make cupcakes for special occasions. They charge $5 per cupcake. They've received a request for a special order for 232 cupcakes at a price of $5 each. The costs to produce a single cupcake are:

Direct materials of $2.23
Direct labour of $1.95
Packaging of $1
Fixed costs of $3,764 for factory rent and equipment

What is the impact on Ariel Cupcakes' profit of accepting the special order? Please answer to 2 decimal places. If accepting the order will generate a loss, be sure to add a minus/negative before your answer.

BlackTom AI · Accepted Answer

Contribution margin per cupcake is price minus variable (incremental) cost, so we compare $5.00 selling price to only the costs that change with production.

1) Relevant knowledge points and concepts
- Incremental (relevant) costs for a special order are the variable costs (direct materials, direct labour, packaging). Fixed costs (factory rent and equipment) are sunk for the period if they do not change with the order and therefore are not relevant to the accept/reject decision.
- Contribution margin = Selling price − Variable cost per unit. Total impact on profit = Contribution margin per unit × Quantity.

2) Complete reasoning process step by step
- Compute variable cost per cupcake by summing direct materials, direct labour, and packaging.
- Compute contribution margin per cupcake = Price − Variable cost per cupcake.
- Multiply contribution margin per cupcake by the order quantity (232) to get total change in profit.
- Do not include fixed costs because they are unchanged by the special order.

3) Calculations with intermediate steps
- Variable cost per cupcake = $2.23 (materials) + $1.95 (labour) + $1.00 (packaging) = $5.18.
- Selling price per cupcake = $5.00.
- Contribution margin per cupcake = $5.00 − $5.18 = −$0.18.
- Total impact = −$0.18 × 232 = −($0.18 × 232).
- Compute $0.18 × 232: 0.18 × 200 = 36.00; 0.18 × 32 = 5.76; sum = 41.76.
- Therefore total impact = −$41.76.

4) Why the correct answer is correct
Because the special order price does not cover the variable cost per cupcake (price $5.00 < variable cost $5.18), each cupcake generates an incremental loss of $0.18. Multiplying by 232 units yields a total incremental loss of $41.76. Fixed costs remain unchanged and thus do not offset this incremental loss.

5) Other options
(There are no multiple-choice options here. Any alternative that included fixed costs as relevant would be incorrect because rent and equipment are fixed and not affected by the order.)

6) Conclusion
The impact on Ariel Cupcakes’ profit from accepting the special order is a loss of $41.76, i.e., −41.76, which matches the provided answer.

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