Question

MNS Company produces helmets which it normally sells to retailers for $6 each.   The cost of manufacturing 25,000 helmets is:

  

Materials	$  10,000
Labor	30,000
Variable overhead	20,000
Fixed overhead	40,000
Total	$100,000

it also incurs $0.30 on each helmets sold. XYZ L td offers MNS company $ 4.25 per helmet for 3,000 helmets. if MNS company accepts the offer, its fixed overhead will increase by $3000 due to the purchase of a new imprinting machine.Sales commission for the special order will be only half of that of the normal sales.

MNS company currently operatesat at 85% of capacity, and accepting the offer shall not impose any constraints on its current production. XYZ Ltd will sell the helmets in the same market that is served by MNS company.   

  

Instructions

  

(a)	Based on quantitative factors, determine whether or not MNS company should accept the special order? Show calculations
(b)	Explain briefly, what other qualitative factors should MNS company consider in deciding whether or not to accept this special offer

Answer 1

(a)

Incremental Revenue	$         12,750	=3000*4.25
Incremental Expenses
Materials	$           1,200	=10000/25000*3000
Labor	$           3,600	=30000/25000*3000
Variable Overhead	$           2,400	=20000/25000*3000
Fixed Overhead	$           3,000	3000
Sales Commission	$              450	=3000*0.3*1/2
Total Incremental Expenses	$         10,650
Incremental Income	$           2,100

Since there is incremental income, company should accept the order.

(b)
Quality of product - Company should as to whether at lower sales price, will company be able to provide quality products and their impact on the market accordingly.

Opportunity cost - Company has to see by accepting the order, is there any other opportunity that company is losing.

Capacity - Whether the company has excessive capacity to fulfill special order or if they have to give up regular sales and cost for the same.