Question

Suppose for example a business has received a special order of 3,000 units for one of its products.
The product normally sells at ₹8.00 but the customer has requested a price of ₹5.00. The unit
product cost is ₹6.00 comprising direct material and labor costs of ₹3.50, variable overhead costs
of ₹0.90 and fixed overhead costs of ₹1.60. The business has adequate capacity to manufacture
additional 3,000 units. Could you help the firm to decide whether to accept or reject the special
order? [4

Answer 1

Answer:-

When we deciding whether to accept special order we should consider several factors:

=>The capacity requirements to fulfillment of the special order

=>Whether the price requested by the buyer will cover the cost of producing the products.

=>The role of fixed costs in the analysis

here the Company have enough capacity to produce an extra 3000 units , that means if we use this capacity to produce extra 3000 units then it's should not affect the Fixed cost because we fixed cost is remain fixed even if we don't use capacity.

now we find the contribution per unit:-

Selling price = $5

- Variable cost (Material and labor cost ) = $3.50

- variable overhead = 0.90

so contribution per unit = $0.6 per unit

so here the requested price $5 is covers the cost of production (variable cost)$4.40. so here we should accept the offer by consumer and produce the extra 3000 units of output