Question

Hope Company has received a request from University of Bahrain to produce and sell 5,000 Chairs for students in the classes at special price of $45 each The normal selling price is $60, and its unit product cost is $37 as shown below: $15 Direct materials Direct labor Mamfacturing overhead Unit product cost $37 Additional information: 50% of the manufacturing overhead is variable. University of Bahrain asked the company to print the university logo on each chair which cost Hope Company $2 for each chair, and also asking to add stand for each chair which need more direct materials costing $20,000. To fulfill the special sale order, Hope Company has to purchase special machine costing $50,000 that can be sold after using in the special sale order for $20,000. This order should have no effect on the company's other sales. The production manager says that she can handle the special order without disrupting any of the company's regular scheduled production Required: Answer each of the following questions 1. Determine whether Hope Company has to accept or reject this offer. Answer Per unit Tota Total Decision:

Answer 1

Answer:

Data given in the question:

Hope company has received the Order of 5000 chairs @ $ 45 each.

In the normal situation cost of the production of each chairs is given below:

Particulars	Price
Direct materials	$ 15
Direct Labour	$ 8
Manufacturing overhead	$ 14	50% of Overhead is variable
Unit product cost	$ 37

Computation of additional cost for special order:

a) Cost of printing of logo on the chair $ 2 each chair

b) Cost of procuring the special materials for stand is $ 20,000

Per unit cost for procuring the special materials = Total Cost of materials / Total no. of Chairs

= $ 20000 / 5000

= $ 4

c) For special order, Hope company need to procure a Machine of $ 50000 which have resale value of $ 20000.

Cost of machine for special order of chairs = Machine costing - Re-sale value of machine

= $ 50000 - $ 20000

= $ 30000

Cost per unit of chairs for special machine = Cost of machine for special order of chairs / Total no of chairs

= $ 30000 / 5000 chairs

= $ 6 per chairs

d) Since this order should not effect its normal production cycle, hence Hope company will recover its fixed manufacturing overhead from its normal operating cycle & variable manufacturing overhead will recover from this order.

Manufacturing overhead per unit is $ 14

Variable manufacturing overhead 50% of the total manufacturing overhead i.e. $ 14 * 50%

= $ 7

Profitability statement for production of special order of 5000 chairs:

Particulars	Per unit cost	Total Amount
Selling price of chair	$ 45	$ 225000
Less:
Direct materials	$ 15	$ 75000
Direct Labours	$ 8	$ 40000
Variable Manufacturing Overhead ( (d) above)	$ 7	$ 35000
Cost for printing of logo ( (a) above)	$ 2	$ 10000
Cost of special materials for stand ( (b) above)	$ 4	$ 20000
Cost of special machinery for this order ( (c) above)	$ 6	$ 30000
Total Cost for this order	$ 42	$ 210000
Incremental Profit for this order	$ 3	$ 15000

Conclusion: As per production manager, without disrupting the normal operating cycle company can produce this special order which have profit of $ 15000 ( $ 3 on each chairs). Therefore company should accept this special order.