Terrain Tents produces travel tents. The company's production capacity is 10,000 tents a year. Today, the...

Terrain Tents produces travel tents. The company's production capacity is 10,000 tents a year. Today, the company produces 7,000 pcs a year. The average selling price is 650 kr / pcs. Production costs are all variable (variable costs) and consist of direct raw materials: 90 kr / pcs, direct wages: 200 kr / pcs and indirect costs 15 kr / pcs. Another operating cost is rent, it is 110 kr / pcs. A foreign party has contacted Terrain Tents and requested to purchase 2,500 pcs of travel tickets at 320 kr / pcs. Shall Terrain Tents accept or reject the order (inquiry). Please justify your answer by calculation.

Expert Solution

Total Capacity	10,000
Current production	7,000
Available capacity	3,000
Offer received	2,500

It means the offer received can be produced without any issue but now let us check whether it is viable to accept the offer in monetary terms.

Particulars	Amount(kr/pcs)	Amount(kr/pcs)
Offer price		320
Variable cost
Direct Material	90
Direct Wages	200
Indirect cost	15	305
Contribution Margin		15

The offer will generate a positive inflow of kr 37,500 (=15*2500) for the organisation.The fixed operating cost (Rent) not considered because it is a Sunk cost and it will be incurred irrespective of the offer.

Thus the offer should be accepted.

ekkarill92 answered 2 years ago

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