Question

CDE Ltd has provided you with the following data relating to the product manufactured by his factory: Selling price per unit $ 100 Variable manufacturing costs per unit 48 Fixed manufacturing costs per annum 250,000 Variable marketing, distribution and administration costs per unit 16 Fixed non-manufacturing costs per annum 182,000.

CDE Ltd has spare capacity and receives a special order from an interstate retailer for 1,000 units at a price of $80 per unit. Briefly explain why CDE Ltd should accept or reject the order based on financial analysis. List two qualitative factors CDE Ltd ought to take into consideration in a special order decision.

Answer 1

Solution:
	DIFFERENTIAL ANALYSIS
	CALCULATION OF INCREAMENTAL PROFIT (LOSS) ON ORDER
		Unit	Rate	Amount
	Increamental Revenue (A)	1000	$              80.00	$                 80,000
	Incremental Cost incurred for the proposal
	Variable Manufacturing Cost	1000	$              48.00	$                 48,000
	Variable Marketing and distribution & Admin. Expenses	1000	$              18.00	$                 18,000
	Total Increamnetal Expenses(B)			$                 66,000
	Increamental revenue on accept of proposal(A-B)			$                 14,000
	So this proposal will give the increametal revenue of $ 14,000 so this project can be accepted
Answer = 1 :	Proposal should be accepted
Answer = 2 :
	Qualititative Factors CDE ought to take into consideration:
	1) CDE have the Spare capacity for production of additioanl 1000 units
	2) No addittional fixed cost is incurred for producing these 1000 Units
	3) No effect on current consumer and current selling price due to this order