Question

Select one of the typical decision managers to make using differential analysis discussed in your text (add/delete a product line, make or buy, special order, etc). Write a professional e-mail (1-page) to your supervisor explaining how you arrived at your decision (to add or delete a product line, to make or buy a part, take on or refuse a special order, etc). Include specific calculations as part of your explanation.

Answer 1

To,

The Finance Manager,

Subject : Details regarding the special order #551 received from ABC Company

Respected Sir,

This mail is in reference to the special order #551 received from ABC company for 10,000 units last month. As you are already aware, our plants are operating at less than full capacity. Even though our plant has a total operating capacity of 80,000 units. We are only able to produce and sell 60,000 units currently. Hence we have spare capacity of 20,000 units.

Since we have spare capacity, the additional 10,000 units will only incur variable costs of production, i.e., there will be no effect on the fixed cost of production. Accordingly, I have prepared the following cost-benefit analysis for the special order for your reference :

Particulars	No. of units	Price/Cost per unit	Amount ($)
Sale Price	10,000	20	2,00,000
Less : Variable Costs
Variable manufacturing costs	10,000	10	1,00,000
Variable selling costs	10,000	5	50,000
Profit from special order	10,000	5	50,000

It is clearly evident from the above calculations, that the special order from ABC company should be accepted as it is giving us a profit of 50,000 $. Please let me know if you need any further clarifications or if I have missed something in my calculations.

Thanks and regards,

Team Member

Contact Number : XXX