Question

Kipas Sdn Bhd produces ceiling fans, and is currently operating at 90% of its capacity of 100,000 fans per month. The company has just received a one-time special order from Hong Kong Trading to purchase 2,000 fans at RM110 per unit. If Kipas choose to accept this order, it has to incur an additional fixed printing cost of RM50,000 for the packaging material. The production data is as follows:

Monthly Production Data

Units	100,000
Variable cost/unit	RM80
Total fixed cost	RM4,000,000
Fixed costs per unit 4,000,000/100,000	RM40

 

Required:

a) Should Kipas accept this special order? Support your answer with appropriate calculation.

b) Will your answer change if Kipas can use the excess capacity to engage in a mutually exclusive project that will contribute a profit of RM28,000? Why?

c) Discuss in detail the qualitative factors Kipas should consider before deciding to accept or reject this special order.

Answer 1

a. Computation for Decision making

 

Hence, Kipas should reject this special order. Because it will incur a net loss. Contribution margin = sales(special order 0 -Variable costs

b.

Yes, the answer will change if Kipas can use the excess capacity to engage in a mutually exclusive project that will contribute a profit of RM28,000. Because the exclusive special order incurs loss for the business and engaged in a mutually exclusive project contributes a profit of RM28,000.

Mutually Exdusive Projects are the term that is used generally in the capital budgeting process.

c.

The following are the qualitative factors Kipas should consider before deciding to accept or reject this special order;

• Quality of the product

• Existing customer's reactions

• Reactions of the investors