Question

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr Inc. wants to buy 5,000 units at SAR 27 per unit. Rafique Inc. has a normal capacity of 101,000 units and projected sales to regular customers this year is 92,000 units. Per unit costs traceable to the product (based on normal capacity of 92,000 units) are listed below?

Direct Materials??8.1

Direct Labour?`??6.0

Variable Mfg. Overhead?6.2

Fixed mfg. overhead??4.8

Fixed administrative costs?0.8

Fixed Selling Costs??0.4

Does the quantitative analysis suggest that the company should accept the special order?

k   Q 3 Discuss the qualitative factors in Keep or Drop Decision in details.

Answer 1

Solution 2:

Variable cost per unit = direct material + direct labor + variable manufacturing overhead = 8.1 + 6 + 6.2 = SAR 20.30

Revenue from special order = 5000 * SAR 27 = SAR 135,000

Cost to be incurred on special order = 5000 * 20.30 = SAR 101,500

Additional income from special order = SAR 135,000 - SAR 101,500 = SAR 33500

Therefore accepting special order will result in increase in operating income of SAR 33500, therefore company should accept the special order.

Solution 3:

There are various qualitative factors that company must consider to keep or drop special order. Some of these are as under:

a. Company should know who is customer giving special order. What is the credit worthiness of customer. Will he able to pay money on time for order made.

b. Whether special order requires extra efforts in terms of material and direct labor on special requirement of vendor. Whether cost of extra effort already taken into account before accepting special order.

c. Company should see, if special order is to be sold at lower price, whether it will affect regular sales volume as regular customer will demand price reduction and it may result in cost to the company.