In the context of microeconomics, accepting a special order will improve which of the following, assuming the order is priced above variable cost and there is excess capacity?

• A. Total assets
• B. Fixed costs
• C. Market equilibrium price
• D. Operating profit

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the key terms in the problem. A 'special order' is an order that is outside the regular sales, often at a different price. 'Variable cost' refers to costs that change with the level of output, while 'fixed costs' remain constant regardless of output. 'Excess capacity' means the firm can produce more without increasing fixed costs.
2. Step 2: Analyze the condition that the special order is priced above variable cost. This means the price received for the special order covers the additional cost of producing the extra units, contributing positively to profit.
3. Step 3: Consider the impact of accepting the special order on fixed costs. Since fixed costs do not change with output, accepting the order does not increase fixed costs.
4. Step 4: Evaluate the effect on total assets and market equilibrium price. Accepting a special order typically does not immediately affect total assets or the market equilibrium price, as it is a one-time or separate transaction and does not change market supply or demand significantly.
5. Step 5: Conclude that because the special order price is above variable cost and there is excess capacity, the additional revenue from the order increases operating profit by covering variable costs and contributing to fixed costs, improving the firm's operating profit.