In: Accounting
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.
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.