Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 255

A large retail customer made an offer to buy 10,000 units at a special price of $7 per unit. The manufacturer usually sells each unit for $10. Variable manufacturing costs are $5 per unit and fixed manufacturing costs are $3 per unit. For the manufacturer to accept the offer, which of the following assumptions needs to be true?

Answer options

• A. Fixed and variable manufacturing costs are less than the special offer selling price.
• B. The manufacturer can fulfill the order without expanding the capacities of the production facilities.
• C. Costs related to accepting this offer can be absorbed through the sale of other products.
• D. The manufacturer's production facilities are currently operating at full capacity.

Correct answer: C

Explanation

The correct answer is C because the manufacturer needs to ensure that the costs of fulfilling this order can be offset by other sales. A is incorrect since the fixed costs do not change regardless of the order. B is not necessarily true, as the manufacturer may need to adjust capacity. D contradicts the premise of accepting additional orders at a lower price.