PROBLEMS ON ACCEPT OR REJECT SPECIAL ORDER DECISION
P – 1. The flexible budget at 80% capacity of Dynamic Company Ltd. is as follows:
Production in units
30,000
Sales value
Rs. 600,000
Material cost
15,000
Labour cost
105,000
Overhead cost
Variable
60,000
Semi variable
35,000
Fixed
100,000
An offer of for additional 3,750 units sales is available if it is supplied at Rs. 7 each. If
the semi variable overhead increases only Rs. 1,250 for the additional production will it
be advisable to accept this offer?
P –2. Due to industrial depression a plant is running at present at 50% of its capacity.
The following details are available.
Particulars
Cost of production per unit
Direct material
Rs. 2
Direct labour
1
Variable overhead
3
Fixed overhead
2
Total Rs.
8
Production per month
20,000 units
Total cost of production
Rs. 1,60,000
Sales
Rs. 1,40,000
Loss
20,000
An exporter offer to buy 5,000 units per month at the rate of Rs. 6.25 per unit and the
company hesitate to accept the order for fear of increasing its already operating loss.
Advice if the company should acceptor rejects this offer?
P – 3. The uniform product company produces a single product. Its maximum annual
production capacity is 480,000 labour hours. Currently it is producing at an annual
rate of 375,000 labour hours. Normal volume (the basis of absorption of fixed
overheads) is 450,000 labour hour.
The company has received an offer of 70,000 such units at a special price of Rs. 12 per
unit. The regular selling price is Rs. 15 per unit. The standard cost sheet of one unit of the
product is as follows:
Direct materials (10 kgs @ Rs. 0.50)
Rs. 5.00
Direct labour (1.5 hour @ Rs. 2)
3.00
Variable overhead (1.5 hour @ Rs. 2)
3.00
Fixed overhead (1.5 hour @ Rs. 1)
1.50
Total
Rs. 12.50
Required: In the short run, would it be profitable to accept the offer.
P – 4. ITR Ltd. is currently operating at an annual production volume of 750,000 direct
labour hours. Its annual operating capacity, which cannot be increased, is
1,000,000 direct labour hours. Recently JRT Ltd. has offered to buy 250,000 units
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of the company’s product at a special price of Rs. 10.50 per unit. The regular
selling price is Rs. 12.90 per unit. The standard cost sheet of one unit of the product
appears as under:
Particulars
Rs.
Materials (6 kg @ Rs. 0.40 per kg)
2.40
Direct labour (2 hours @ Rs. 2.50 per hour)
5.00
Variable Overheads (2 hours @ Rs. 0.75 per hour)
1.50
Fixed Overheads (2 hours @ Rs. 1.20 per hour)
2.40
Total
11.30
Would it be profitable to accept the offer?
P – 5. Kathmandu Company Ltd. is specialised in the manufacture of dolls and toys. It
receives an order for 1,000 units of children dolls from a large scale chain store at a price
of Rs. 6 per unit. The company sells this type of doll to its other customers at Rs. 10 each
but it has surplus capacity and can take the special order without affecting adversely its
normal operations for the coming month.
Income statement based on costing records for the preceding month is as under:
Particulars
Rs.
Net Sales 5000 units @ Rs. 10
50,000
Variable cost:
Direct material @ Rs. 3 per unit
15,000
Direct labour @ Rs. 2 per unit
10,000
Fixed cost:
Factory overhead
10,000
Selling and Administrative Expenses
10,000
Total costs
45,000
Profit
5,000
Direct material and direct labour to be incurred on the special order are estimated to be
the same per unit as for regular business. Special tools costing Rs. 500 would be required
to meet the specifications of the chain store. There will be no change in other expenses.
You are required to prepare a differential cost analysis for deciding about the
acceptance of the order.
P –6 6 The Leobl Company is considering the submission of a bid to an agency of the
Defense Department for 50,000 units per month of its batter-powered fingernail
clippers. The design and manufacturing operations for this item for the armed
forces would be the same as for the company's standard commercial line, which
sells at $1.75 per unit.
Geared to a normal capacity of 400,000 units per month, the Loebl Company has been
operating for the last few months at about 300,000 units.
Management has learned informally that competitive bids are ranging in price from
$1.30 to $1.45 per unit. It believes that if it can bid $1.25 per unit, the company can land
the contract. It is to quote a price with terms net, f.o.b. Company's plant.
Pertinent data for current monthly activity are:
Cost item
Costs Incurred last
Budget at normal
month
capacity
(300,000 units)
(400,000 units)
Direct materials
$135,000
$180,000
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Direct labor
75,000
100,000
Indirect labor
45,000
60,000
Heat, light, power
28,000
36,000
Supervision
55,000
70,000
Depreciation
40,000
40,000
Engineering
20,000
20,000
Sales commissions
21,000
28,000
Packing costs
15,000
20,000
Freight out
15,000
20,000
Office expenses
15,000
15,000
Advertising
19,000
22,000
Miscellaneous administrative
6,000
6,000
Total costs
$489,000
$617,000
Required:
a. Determine the desirability of submitting a bid of $1.25 per unit.
b. At what price should the contract be bid to bring monthly total company operating
profit to a level equal to a return of 15 percent on average monthly operating assets
of $350,000 (i.e. average balance of $4,200,000 dividend by 12)?
c. Comment on other factors affecting the decision.
P – 7. Anchor Company manufactures several different styles of jewelry cases.
Management estimates that during the third quarter of 19×6 the company will be
operating at 80 percent of normal capacity. Because the company desires a higher
utilization of plant capacity, the company will consider a special order.
Anchor has received special order inquires from two companies. The first order is from JCP
Inc., which would like to market a jewelry case similar to one of Anchor's cases. The JCP
jewelry case would be marketed under JCP's own label. JCP Inc. has offered Anchor
$5.75 per jewelry case for 20,000 cases to be shipped by October 1, 19×6. The cost
data for the Anchor jewelry case which would be similar to the specifications of the JCP
special order are as follows:
Regular selling price per unit
$9.00
Costs per unit:
Raw materials
Direct labour 0.5 h @ $ 6.00
$2.50
Overhead 0.25 machine h @ $4.00
3.00
1.00
Total costs
$6.50
According to the specifications provided by JCP Inc., the special order case requires less
expensive raw materials. Consequently, the raw materials will only cost $2.25 per case.
Management has estimated that the remaining costs, labor time, and machine time will be
the same as the Anchor jewelry case.
The second special order was submitted by the Krage Co. for 7,500 jewelry cases at
$7.50 per case. These jewelry cases, as with the JCP cases, would be marketed under the
Krage label and have to be shipped by October 1, 19×6. However, the Krage jewelry
case is different from any jewelry case in the Anchor line. The estimated per-unit costs of
this case are as follows:
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Raw materials
Direct labor 0.5 h @ $6.00
Overhead 0.5 machine h @ $4.00
$3.25
3.00
2.00
Total costs
$8.25
In addition, Anchor will incur $1,500 in additional setup costs and will have to purchase a
$2,500 special device to manufacturer these cases; this device will be discarded once the
special order is completed.
The Anchor manufacturing capabilities are limited to the total machine hours available.
The plant capacity under normal operations is 90,000 machine hours per year or 7,500
machine hours per month. The budgeted fixed overhead for 19X6 amounts to $ 216,000.
All manufacturing overhead cost are applied to production on the basis of machine hours
at $4.00 per hour.
Anchor will have the entire third quarter to work on the special orders. Management does
not expect any repeat sales to be generated from either special order. Company practice
precludes Anchor from subcontracting any portion of an order when special orders are not
expected to generate repeat sales.
Required: Should Anchor Company accept either special order? Justify your answer and
show your calculations.
P – 8. The long company is currently operating at its full capacity of 200,000 units
annually costs are as bellow:
Direct material
Rs. 640,000
Direct labour
Rs. 320,000
Variable overhead
Rs. 160,000
Fixed overhead
Rs. 96,000
Fixed sales and distribution expensesRs. 48,000
Variable selling and distribution exp.Rs. 64,000
The product is sold under long company brand Rs.10. Hari distributors offer to purchase
80,000 units annually for the next five year at Rs.6.60 per unit. This offer, If accepted will
not affect the current selling price because Hari distributors will sell under its own brand
name. Acceptance of the offer will have the following results.
 Labour costs on the additional 80,000 units will be 1.5 times the regular rate.
 Variable selling and distribution expenses will increase by Rs.0.08 per unit on
additional unit only.
 The required additional material can be purchased at 5% volume discount.
 All other cost factors will remain the same.
Required: Should Long Co. accept the offer? Show all your computations in support of
your conclusion.
P – 9. The Kathmandu Soap & Chemical company produces and sells toilet soap. The
income statements at two different levels of activities are summarized below:
Sales in boxes
50,000
100,000
Sales revenue
Rs. 2,500,000 Rs. 5,000,000
Less: Cost:
Direct Materials
500,000
1,000,000
Direct wages
500,000
1,000,000
Indirect wages
250,000
500,000
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Heat, Light & Power
Supervision
Depreciation
Sales Commission
Packing cost (wrapper)
Carriage outwards
Advertising
Administration & other
250,000
350,000
250,000
350,000
500,000
500,000
125,000
250,000
50,000
100,000
50,000
100,000
50,000
75,000
100,000
100,000
Rs. 3,475,000 Rs. 4,325,000
The sales for 1983 were 75,000 boxes and which was only 75% of capacity available.
On January 1st 1984 the Kathmandu Hotel (P) Ltd. approached the company with a
special offer to supply 20,000 boxes of special brand toile soap at Rs.40.00 per box.
The soap was to bear special hotel monogram and was to have appellant fragrance to
the taste of Hotel guest.
The special device to print hotel monogram will cost additional Rs.200,000 and special
fragrance will increase the materials cost by Re. 1 per box. All other fixed cost and
materials cost will remain unchanged.
Required: Should the company accept this special offer?
(TU 2041)
P – 10. Purna Enterprises manufactures a variety of office furniture items, including a
beautiful Mahogony desk. A representative of a Middle-Eastern nation approaches
the firm with an offer to buy 200 desks at a price of Rs. 450 each. Normal price is
Rs. 600. The production of the 200 desk would not require the addition of any
production facilities or other fixed costs. The following schedule presents cost data
pertaining to the production and sale of Mahogony desks:
Particulars
Total costs for unit
5,000
Cost
Desks
Direct Materials
Rs.
Rs. 250
1,250,000
Direct Labour
5,00,000
100
Manufacturing overhead (40% variable)
7,50,000
150
Variable selling (all commission)*
2,40,000
48
Fixed selling
50,000
10
Administrative (all fixed)
75,000
15
Allocated corporate expenses
1,00,000
20
Rs.
Rs. 593
29,65,000
* The sales commission is based on a flat fee of Rs. 48 per desk sold.
Required:
a)
If there is no commission expense, should Purna accept this special order?
b)
If the order is accepted, what would be the effect on company probability?
c) Should the order be accepted if a commission fee must be paid to the sales
representative covering the Middle East?
(TU 2045)
P – 11 The waterbed company manufactures several types of waterbeds. Expecting a
jump in demand for its product, the company built a large plant that currently is
being utilized at 60 percent of capacity. A salesman brings in an offer from a
large motel chain to purchase 100 heated king-size waterbeds for a price of Rs.
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450 each. Normal selling price for the bed is Rs.800 each. The schedule of the
present costs of the king-size waterbeds for the current year's production was as
follows: Acceptance of the order would cause no increase in any fixed cost.
Particulars
Costs for 1,000
Unit cost
units
Direct Materials
Rs. 260,000
Rs. 260
Direct Labour
80,000
80
Manufacturing overhead (40% variable)
160,000
160
Marketing (1/3 variable)
120,000
120
Administrative (10% variable)
100,000
100
Total
Rs. 720,000
Rs. 720
Required:
a) Should the company accept the offer? Support your answer.
b) Would your answer to a change is sales commission of Rs. 20 a bed could be
eliminated on this special order?
c) Assume that 75 percent of the variable marketing costs can be eliminated. What
would be the effect on the net income from accepting this order?(TU 2046)
P – 12. The Kathmandu Product Ltd.; a company engaged in production of specialized
goods called ‘Kath Craft’ has been utilizing its capacity only by 80% of its
available capacity. The company received an special offer to supply 25,000 units
of its product most similar to one the company at present is selling in the market,
but under different brand name. The price offered is Rs.100 per unit. The data
relating to produce one unit of regular product are presented below:
Direct Material cost 4 units @ Rs. 10
= Rs. 40.00
Direct Labour cost 3 hours @ Rs. 10
= Rs. 30.00
Manufacturing overhead 3 hours @ Rs. 15
(based on direct labour hour)
= Rs. 45.00
Total cost per unit
Rs. 115.00
The company at present is selling its product at Rs. 150 per unit. The company has
adopted a policy of defining its capacity in direct labour hour. The annual normal
budgeted hour is 300,000 hours and the budgeted fixed overhead for the period is Rs.
15,00,000. All manufacturing overheads are applied to production on the basis of direct
labour hour at Rs. 15 per hour. The special offer will have no other cost than regular
production cost.
Required:
a) Should the company accept this offer and also show how total profit of the company
would change by accepting this offer?
b) Would the company have any opportunity cost of the offer?(TU 2050)
P – 13. A company with a normal capacity of 25,000 DLH has been able to utilize only
80% of its capacity in the past. The company received an offer to supply 30,000
units of its product but in the other brand name at a price of Rs. 15 per unit. The
regular selling price and cost of manufacturing one unit of output have been
detailed below:
Selling price per unit
Rs. 20
Direct material
Rs. 5
Direct labour 0.25 hours
Rs. 5
Manufacturing overhead cost 0.25 hour
Rs. 6
6
Total manufacturing cost
Rs. 16
The selling and distribution cost would be Rs. 2 per unit and budgeted fixed
manufacturing cost for normal capacity volume would be Rs. 300,000.
Required:
a.
Differential cost analysis
b. Opportunity cost of offer if any.
(TU 2056)
P – 14. The income statement of Nepal Thai Food Ltd. has been presented below:
Products
Lovely
Fancy
Total
Sales unit
3,000
2,000
5,000
Sales revenue
60,000
20,000
80,000
Less: Variable cost of goods sold
30,000
10,000
40,000
Contribution margin
30,000
10,000
40,000
Less: Fixed cost
Joint cost
10,000
2,000
15,000
Departmental fixed cost
8,000
7,000
10,000
Total fixed cost
18,000
7,000
25,000
Net income
12,000
3,000
15,000
Company received a special offer to supply 2000 units of lovely product in a different
brand name, at Rs.16 per unit. The special product would need material cost of Rs.5 per
unit, direct labour cost of Rs.4 per unit and the variable manufacturing overhead cost of
Rs.2 per unit. The company has been able to utilize its capacity in the past and production
of special product would be possible only if, the production and soles of Fancy product
could be curtailed by 1000 units. However, the special product would need investment in
special device a sum of Rs.4,000 and would have to spend Rs.2,000 for setup cost.
Required:
1.
Sales volume to company break even.
2.
Differential cost analysis to decide whether the company should accept the order.
3.
Opportunity cost of order if any.
A company has normal capacity of 60,000 Direct Machine Hours (DMH). The
production and sales volume per year at present have been given below:
Regular demand in units
1,00,000 units
Cost of production per unit:
Direct material
Rs. 30.00
Direct labor, 1 hour
12.00
Manufacturing overhead, 0.5 DMH
48.00
Selling price per unit:
Rs. 100
Budgeted fixed overhead at present capacity Rs. 3,600,000
The company received an offer to supply 25,000 units at a price of Rs. 75 per unit
Required:
a) Statement showing differential analysis to decide whether the company should or
should not accept the offer.
b) The opportunity cost of special offer if the company accepts the offer.
c) What other qualitative factors might be relevant here?
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