Question

QUESTION 2
(a) SNA Limited produces cement which can be used both locally and abroad. The company
is currently operating at 80% capacity for the local market. Results under the capacity
(80%) are as follows:
GH₵
Sales
6,400,000
Direct materials
2,000,000
Direct labour
800,000
Variable overheads
400,000
Fixed overheads
2,600,000
A company from Benin has placed an order that would utilize 50% of the capacity of the factory.
The order when taken will attract 15% below the normal local price and cannot be split but
should be taken in full.
Management of SNA Company has the following available options:
Either to;
(i)
Reject the order and continue with the local sales only or;
(ii)
Accept the order and split capacity between overseas and local sales and reject excess
local demand; or
(iii)
Increase capacity to accept the export order and still maintain the local sales by;
(a) Acquiring an equipment that will increase capacity by 10% which will result in an
increase of GH₵200,000 in fixed costs, and
(b) Start working overtime to meet balance of required capacity. Labour will then be paid at
one and a half the normal wage rate.
Required:
Prepare a Statement of profitability for each of the three (3) options columnally and recommend
the best option.
(NB: Show working)
b) State four (4) qualitative factors that you will consider in accepting the foreign order.

Answer 1