Question

MNS Company produces helmets which it normally sells to retailers for $6 each. The cost of manufacturing 25,000 helmets is: $ 10,000 30,000 20,000 40,000 $100,000 Materials Labor Variable overhead Fixed overhead Total It also incurs $0.30 on each helmet sold. XYZ Ltd offers MNS company $4.25 per helmet for 3,000 helmets. If MNS company accepts the offer, its fixed overhead will increase by $3,000 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 operates 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. [Total 8 Marks] Required: (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 order. 17 Marks [1 Mark]

Answer 1

PART - A

MNS Company -A	25,000	UNits
Current Capacity (85%) -B	85%
Total Capacity (100%) - A/B	29,412	Units

So At Maximum Capacity Company can produce 29,412 Units

Particular	Quantity	Rate	Amount
Material	25,000	0.40	10,000
Labour	25,000	1.20	30,000
Variance	25,000	0.80	20,000
Total Variable Cost ( Per Unit )		2.40	60,000

Balancing Figure

Particular	Present sale - 25000 Units		If accept offer ( Proposed )
			Normal Sale ( 25000 Units )		Sale to XYZ ( 3000 Units)
	Rate per unit $	Amount in $	Rate per unit $	Amount in $	Rate per unit $	Amount in $
Sales	6.00	1,50,000	6.00	1,50,000	4.25	12,750
Variable Cost	2.40	60,000	2.40	60,000	2.40	7,200
Contribution	3.60	90,000	3.60	90,000	1.85	5,550
Selling & Admin Cost	0.30	7,500	0.30	7,500	0.15	450
Fixed Cost		40,000		40,000	-	3,000
Profit		42,500		42,500		2,100
Total Profit	42,500		44,600

Notes :

1	Company Should Accept the offer as it will give addition Profit of Rs $ 2,100
2	It has provided that XYZ limited will also serve same market it may have affect our current retail sale price but as no information regarding change in sale price we have assumed it is same $ 6 .
3	Fixed Cost always remain Fixed as it is not increased with the change in Unit, But addition fixed cost has been charged against sale to XYZ as it is specific Fixed Cost

PART - B

other than Quantitative Factors, there are many qualitative factor to consider whether proposal should be accepted or not are as follow :

- existing customers may feel if they discover that a lower price was offered to the special-order customer.

-A special order that might be profitable could be rejected if the company determined that accepting the special order could damage relations with current customers.

-It May affect Current Price in Market which may result in Loss in retail Section

- Whether Company will able to achieve production & Economic Situation.