Question

Given the following data for Tan Company
Sales (in units)	60,000
Selling price per unit	28
Manufacturing costs per unit:
Materials	5
Direct labor	4
Overhead
Variable	4
Fixed	10
Total	23
Gross margin	5
Selling and admin. Expenses per unit	2
Operating income	3
A company in a foreign market offer to buy and the offer specifies the following data
units to be sold	10,000
price per unit	13
What is the logical decision about this special offer

	1.	Do not reject the special offer
	2.	Reject the special offer
	3.	Indifferent to reject or not the special offer
	4.	Always accept the special offer

Answer 1

Correct decision-------------2.Reject the special offer

.

The cost of accepting offer is more than revenue generated by it so it is better to reject the order.

Below given working shows the justification behind the decision.

Calculation of Additional Cost of Order
	Per Unit	Total
Direct material	$                      5.00	$ 50,000
Direct labor	$                      4.00	$ 40,000
Variable manufacturing overheads	$                      4.00	$ 40,000
Variable selling expenses	$                      2.00	$ 20,000
Total Additional cost due to acceptance of order	$                    15.00	$ 150,000

Fixed expense do not increase due to acceptance of offer , only variable cost will be incurred.

.

financial advantage (disadvantage) of accepting the special order
Additional Revenue from offer (10000 x $13)	$ 130,000
Less: Total Additional cost due to acceptance of offer	$ 150,000
Financial Disadvantage	-$ 20,000