Question

RankinCompany, located in the GTA, manufactures a variety of industrial valves and pipe fittings. Currently the company is operating at about 70 percent capacity and is earning a satisfactory return on investment.GlasgowIndustries Ltd. of Scotland has approached management with an offer to buy 120,000 units of a pressure valve.

GlasgowIndustries manufactures a valve that is almost identical to Rankin’spressure valve; however,a fire in GlasgowIndustries valve plant has shut down its manufacturing operations. Glasgowneeds the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $21 for each of the valves.

Rankin’sproduct cost for the pressure valve is

;Direct Materials$6

Direct labour (0.5 hr per valve)$8

Manufacturing overhead (1/3 variable)$9

ditional costs incurred in connection with sales of the pressure valve are sales commissions of 5% and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. Freight expense will be paid by GlasgowIn determining selling prices, Rankinadds a 40% markup to product cost. This provides a $32 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at$30 to maintain market share.Production management believes that it can handle the GlasgowIndustries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order,Rankinwill manufacture and ship 30,000 pressure valves to GlasgowIndustrieseach month for the next four months.

required:

a.Determine how many additional direct labour hours will be required each month to fill the Glasgoworder.

b.Prepare an analysis showing the impact on profit before tax of accepting the Glasgoworder.

c.Calculate the minimum unit price that Rankinmanagement could accept for the Glasgoworder without reducing net income

d.Identify and briefly explain the strategic factors that Rankinshould consider before accepting the Glasgoworder (8marks)

e.Identify the factors related to internationalbusiness that Rankin should consider before accepting the Glasgoworder.

Answer 1

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a. Determine how many additional direct labour hours will be required each month to fill the Glasgoworder

Monthly increase in No. of units = 30,000

Direct Labour hours per unit = 0.5 Hrs

Additional Direct labour hours per month = 30000*0.5 = 15,000 Hrs

b.Prepare an analysis showing the impact on profit before tax of accepting the Glasgoworder

Note:- Only variable costs are considered in the analysis as fixed costs are already fixed and will not increase due to this order. Only increase in fixed cost of $12,000 will occur which is accounted below.

Net profit for the 4 months will increase by 198000 * 4 = 792000

c. Calculate the minimum unit price that Rankinmanagement could accept for the Glasgoworder without reducing net income

Minimum unit price should be equal to the total cost per unit which comes out to be 14.40

d) Identify and briefly explain the strategic factors that Rankinshould consider before accepting the Glasgoworder

The main strategic factors to be considered before accepting the order of Glasgoworder is that the order should not affect of hamper the existing customer order. That is to say that the order should be made using the spare 30 % capacity utilisation only and normal flow should not be disturbed.

Further any direct material/ labour or other resource, if scarce, should be first used for fulfilling the existing order before being allocated towards this newer order.

Lastly, Glasgoworder is a competitor who is coming for help only because of fire in his own factory. The business relations and dynamics need to be considered before accepting the order. The competitive policies adopted and level of competition and business relation will play the most strategic role in determining if the order should be accepted.

e) Identify the factors related to internationalbusiness that Rankin should consider before accepting the Glasgoworder

Rankin should consider any additional costs or burden including any custom taxed or other dues which are related with an export order.

Further, the foreign currency rate exchange fluctuations should also be factored in and should possible be hedged.

Any other trade barriers and political situtation of the two countries should be adjudged before accepting the order.