Question

Qshoes a manufactured company that produces shoes. On regular basis, it sells a pair of shoes for $40. Qshoes can produce a maximum of 51000 pairs of shoes per year. Mr. Jasim Alsaadi is the management accountant of the company. He produced the following summary about the costs:

DM	13
DL	2.5
VOH	0.5
FOH	14.5
V Selling	2
F Selling	4
Total	36.5

Mr. Khaled Almalki is the owner of the company. He called Mr. Alsaadi for an urgent matter:

Mr. Almalki: Alsalam Aliulcrn Mr. Alsaadi, I have received a special order from a foreign customer, his name is Mr. Sam Neil. It seems our brand is doing well worldwide. He is asking for a special order of 11000 pairs of shoes under the following       conditions:

Mr. Sam will pay all the variable and fixed manufacturing overhead costs related to his special order.

In addition to the above, Mr. Sam will pay also a fixed price of $5 per pair.

He will collect the 11000 pairs from our factory. Thus, the company will not pay any selling variable costs (shipment costs) for his special order.

Mr. Alsaadi: Wa Alikum Al Salam boss, it seems a good deal, especially that we are currently produce 40000 pair of shoes this year and we still have a production capacity to produce this special order without incurring any additional fixed costs.

Mr. Khaled ask ysur_group for consultation, discuss sad solve withintvo- group members the following requirements: (Use Excel for calculation requirements)

As a result of the conversion above, Mr. Almalki (the owner of the company) decided to accept Mr. Sam's offer. In this case, by how much will the new operating income decrease_QH increase?

Assume that Mr. Alsaadi noticed that the company is already using the maximum capacity (51000 pairs per year). He called Mr. Almalki (the owner of the company).

Mr. Alsaadi: Boss, in case we accept the offer, it exceed our maximum capacity. Thus, we will buy new equipment that costs $30000. In order not to have losses, we will sell the 11000 pairs of shoes at a normal price (considered as regular sales). Mr. Almalki: Thank you for your notification, I have discussed the matter with Mr. Sam, it seems he is in need to the 11000 pairs and thus he accept to buy based on normal price. Since he will purchase the 11000 pairs based on normal price, he will not pay the satiable and fixed costs of the special order. Moreover, he will not collect the merchandise from our factory. Instead, we will deliver the merchandise; that enforce us to pay variable selling expenses (shipment costs).

In this case, how much will the new operating income decrease OR increase? Which situation do you prefer (requirement I or 2)? Why?

What other factors would you recommend to the owner (Mr. Almalki) to consider before making any decision regarding the special offer?

Answer 1

Factor to be considered

The Main factory is New order would not effect existed market demand and Market price at all.