Question

Q 2 The cost to produce one unit of the product is: Material $ 12.00 Labor $ 9.00 Variable cost $ 6.00 Fixed expenses $ 18.00 Total fixed expenses: $ 1,440,000 The company’s normal capacity is 100,000 units. The figures given above are for 80,000 units. The company has received a special offer for 20,000 units for a price of $ 36 per unit from a foreign customer. Advice the manufacturer on whether the order should be accepted.

Answer 1

Answer)

Acceptance of Special Offer: The decision of whether to accept the special order or not should be based on its relevant cost.

Calculation of Relevant Cost

Particulars	Amount per unit
Cost to be incurred due to Acceptance of Offer :
Material	$ 12.00
Labour	$ 9.00
Other Variable Cost	$ 6.00
Total Relevant Cost	$ 27.00

Decision: Since the relevant cost of the order (i.e. $ 27.00 per unit) is less than its selling price per unit (i.e. $36.00 per unit), the special order should be accepted. The acceptance of special order will be additional contribution margin of $ 180,000 [i.e. ($ 36.00 - $ 27.00) X 20,000 units].

Working Notes:

• The relevant cost of the order is the cost the cost to be incurred due to acceptance of order (i.e. variable cost of production).
• Since the special order of 20,000 units is Equal to the spare capacity available (i.e. 100,000 units - 20,000 units), there will be no increase in fixed cost due to acceptance of order and thus no part of fixed cost should be charged to the special order.