Question

3. Special order: 10 marks Soundwave Printing Company (SPC) is a stationary wholesaler. One of the company's product lines is hardback notebook that are sold to stationary retailers and supermarkets at a price of $8.00 per unit. Based on the annual production of 15,000 units, Soundwave Printing's costs for producing a hardback notebook are as follows: Paper Hardcover Other direct material (i.e., staples and glues) Direct labour Variable overhead Fixed overhead Total cost per notebook $1.00 $1.20 $0.50 $0.80 $1.00 $0.95 $5.45 Cybetron University (CU) is the host of an international academic conference in 2020. CU approach SPC and order a paperback notebook as a conference gift. They will require 2,000 notebooks and are willing to pay $4.20 each notebook. It is worth noting that, paper cover replaces hardcover of the notebook and cost can be reduced by 60% of each unit. Meanwhile, SPC also can save 20% of direct labour and variable overhead costs for making the paperback notebook. One extra cost of the paperback notebook is a spiral cost $0.5 each. Required: a) Based on Cybetron University's offer of $4.20 per unit, should Soundwave Printing Company accept this order or not? Show your calculations. (4 marks) b) If this is a regular order, should manager be prepared to accept these orders at $4.20 as a selling price? List three concerns that the manager of SPC might have and discuss. (6 marks - maximum 10 lines)

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Soundwave Printing Company
In case of special orders fixed costs is not considered for decision making. Fixed costs will continue to incur even if there is no activity and so considered as sunk costs. Only variable costs are relevant in this case.
Particulars	Current cost per unit	Savings %	Decrease by	Cost per unit for special order
Paper	1.00	0%	-	1.00
Hardcover	1.20	60%	0.72	0.48
Other direct material	0.50	0%	-	0.50
Direct labor	0.80	20%	0.16	0.64
Variable overhead	1.00	20%	0.20	0.80
Spiral cost	-	0%	-	0.50
Total	4.50			3.92
Answer a
Total relevant cost per unit of each note book is $ 3.92. Price offered by Cybetron University is $ 4.20. So SPC will earn 28 cents on each notebook. So the offer should be accepted. Total income from the special order is shown below:
Particulars	Amount $
Sell price	4.20
Relevant cost per unit	3.92
Profit per unit	0.28
Number of notebooks	2,000.00
Profit from special order	$ 560.00
Answer b
If this is a regular order then it should not be accepted at $ 4.20 per notebook. Three concerns are below:
1. Because we have not considered fixed cost element. Fixed overhead per unit is $ 0.95 against contribution margin for $ 0.28 so company will incur net operating loss.
2. In case workers demands to increase the wages then it will impact contribution margin.
3. Reducing price from $ 8 to $ 4.20 permanently will impact the overall profitability of the company.