- 10 Marks
Question
A customer has just placed a special order for 25,000 units of Apet and the customer is willing to pay N12.00 per unit. Advise the management whether to accept or reject the order. Assume that for any shortfall in material A required to produce the order, it can be bought at a price of N2.00 per kg. (10 Marks)
Answer
Special order
From the calculations in (a), the decision will be to produce 25,000 units at a
price of ₦13.50. This means that the special order of 25,000 units could be
produced, with the following relevant revenues and costs:
Revenue:
Sales (25,000 units × N12.00) = N300,000
Savings on material A disposal = N3,750
Total Revenue = N303,750
Costs:
- Material B (25,000 units × N2.25) = N56,250
- Labour (25,000 units × N5.625) = N140,625
- Variable Overhead (25,000 units × N2.40) = N60,000
Total Costs = N256,875
Additional Contribution:
N303,750 – N256,875 = N49,875
Decision:
Adeco is advised to accept the special order as it will produce an additional contribution of N49,875.
- Tags: Material Procurement, Relevant Costs, Special Order
- Level: Level 2
- Topic: Decision-making techniques
- Series: NOV 2019
- Uploader: Kofi