Question

A company typically sells its product for $70 per unit. The company has capacity to produce 100,000 units per year, but is currently operating at 82,000. The company has an opportunity to accept a one time order from an international buyer for 15,000 units, but the buyer is only able to pay $40 per unit. The company’s unit costs at 82,000 units of production are $20 for direct materials, $6 for direct labor, $9 for variable manufacturing overhead, $11 for fixed manufacturing overhead, and $8 for variable selling and administrative costs. The company will not incur any variable selling and administrative costs for the order.

1. What would be the impact on profit if the company accepts the special order?

2. Considering the facts of question 2 and considering only the quantitative aspects of the decision, what is the minimum price at which the company should accept the special order?

3. Considering the facts of question 2 and considering only the qualitative aspects of the decision, what is the minimum price at which the company should accept the special order?

4. What are two qualitative factors that should be considered in this decision?

Answer 1

	1	Relavant Cost for the Special Order:
		Direct Material	20.00
		Direct Labor	6.00
		Variable MOH	9.00
		Total Cost	35.00
		Special Offer Price	40.00
		Less: Relevant Cost	35.00
		Net Benefit PU	5.00
		Special Offer Qty	15000
		Net Benefit Total	75000
		Profit will increase by Rs 75000/-
	2 & 3	Question 2 Facts to be used are missing
		Minimum Price will be Cost to be Incurred only i.e. 35/-
	4
	A	Does The company has Exces Capacity to fulfill this order
	B	Will the Order be Profitable
	C	Will the Order affect Planned Sales, NOW or in the Future