Question

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr Inc. wants to buy 5,000 units at SAR 27 per unit. Rafique Inc. has a normal capacity of 101,000 units and projected sales to regular customers this year is 92,000 units. Per unit costs traceable to the product (based on normal capacity of 92,000 units) are listed below?

Direct Materials??8.1

Direct Labour?`??6.0

Variable Mfg. Overhead?6.2

Fixed mfg. overhead??4.8

Fixed administrative costs?0.8

Fixed Selling Costs??0.4

Does the quantitative analysis suggest that the company should accept the special order?

k   Q 3 Discuss the qualitative factors in Keep or Drop Decision in details.

Answer 1

Variable cost per unit of A
Particulars	Amount (SAR)
Direct materials	8.1
Direct labour	6
Variable manufacturing overhead	6.2
Variable cost of each unit of A	20.3

Since, variable cost of per unit of A is only SAR 20.30 which is lower than the price offered by Badr Inc., i.e. SAR 27 per unit the company should accept the order. In-fact considering the normal capacity of the company is to produce 101,000 units whereas expected sales to the customers at SAR 45 per unit is only 92,000 units the company will still be left with 9,000 extra units in normal capacity. Hence, the company should manufacture (92000 + 5000) = 97,000 units of A to accept the order to Badr Inc. at SAR 27 per unit. This will help the company to increase its profit from operations.