Question

ABC Inc. manufactures and sell product A. The sale price and costs on a per unit basis, when 20,000 units per month are sold, are as follows:

                        Manufacturing costs:

                                                Direct materials used $2.00

                                                Direct labour               $1.00

                                                MOH variable             $1.20

                                                MOH fixed                 $1.10

                        Selling expenses

                                                Variable                      $4.00

                                                Fixed                           $1.10

                        Sale price per unit                                                     $15

         ABC Inc. received a special order from Africa Co., headquarter located in Zimbabwe, for 5,000 units at 6 $ each. The variable selling expenses on this special order will decrease by 40% and fixed expenses will increase by $5,000.

c1.       Would you recommend to ABC Inc. to accept or reject the special order? Support your answer with appropriate computations.

c2.       What is the lowest sale price that ABC Inc. should ask from Africa Co.? Show your computations?

c3.       Provide and explain 3 qualitative factors, ABC Inc. should consider before making any decision to accept or reject the special order from Africa Co.

Please provide steps to solve the question, Thank you!

Answer 1

Solution c1:

Computation of income from special order - ABC Inc.
Particulars	Amount
Revenue from special order (5000*$6)	$30,000.00
Costs:
Direct material (5000*$2)	$10,000.00
Direct labor (5000*$1)	$5,000.00
Variable manufacturing cost (5000*$1.20)	$6,000.00
Variable selling expenses (5000*$4*60%)	$12,000.00
Increase in fixed expenses	$5,000.00
Total cost from special order	$38,000.00
Income (Loss) from special order	-$8,000.00

ABC Inc. should reject the special order as there is net loss of $8,000 from special order.

Solution c2:

Lowest sales price that ABC Inc. should ask from Africa Co. = Cost of special order / Nos of units of special order

= $38,000/ 5000 = $7.60 per unit

Solution c3:

Qualitative factor ABC Inc. should consider before making any decision to accept or reject the special order from Africa Co:

1. Payment terms offered by Africa Co

2. Crediblity of buyer

3. Impact on regual sale as regular customer may ask for discount if special price offered to some other customers.