Question

b) A division of Bakhressa Autos has received an enquiry from one of its major customers for a special order for a component that will require 1,000 skilled labour hours and that will incur other variable costs of Tshs. 8000. Skilled labour is currently in short supply and if the company accepts the order then it will be necessary to reduce production of component P. Details of the cost per unit and the selling price of component P are as follows, all figures in Tanzania shilling: Selling price Less: direct labour (4hours at Tshs.10 per hour) 40 Other variable costs Contribution to profit 12 52 36 Required: Determine the minimum selling price the company should accept for the special order. (15 Marks)

Answer 1

Answers

• If special order is accepted which requires 1000 hours, some of the units of ‘P’ cannot be produced and sold.
• Hence, contribution will be lost on those sales. This contribution will also form as a part of relevant cost for special order.
• No. of units of P that cannot be sold = 1000 hours / 4 hours per unit = 250 unit
  Total Contribution margin lost = Tshs 9000 [250 x 36]
• Calculation of minimum selling price:

Contribution margin lost	Tshs9,000
Direct Labor Cost [1000 hours x Tshs Tshs 10]	Tshs10,000
Other Variable Cost	Tshs8,000
Minimum Selling Price that should be accepted for special order	Tshs27,000 = Answer