Dale Devices is a private company in Scotland whose main product is construction machinery. The company has been operating for 25 years and is well established in the marketplace. The company has a capacity to produce 8,000 machines per year, which is the total market demand. Current production and sales are 7,500 machines per year. The company has a selling price of £5,500 per machine. The following are the cost information for the current activity level:

No.	Particulars	Original Expenditure (£)	Actual Expenditure (£)
1	Direct Materials	2,730,000
2	Direct Wages	1,595,000
3	Factory Overheads:
3 (a)	Fixed	3,650,000
3 (b)	Variable	1,465,000
4	Setup costs that vary with the number of batches of production	843,000

 

To derive the Actual Expenditure for items 1 to 4 take the original expenditure plus (+) 891.

The company makes machines for its existing customers in batch size of 250 machines per batch. A new customer is willing to place a one-time special order of 2,000 machines which would be produced from next month at a discounted price of only £(5,000 plus (+) 91) per machine. The special order has to be accepted in full or rejected totally. If the company decides to accept the special order, the company would choose not to renew some contracts which would expire at the end of this month.

 

In addition to direct wages, a supervisor would have to be transferred from another job to work on the special order. The cost of the supervisor is comprised of £8,000 normal payment plus £3,500 additional bonus for working on the special order. Normal payment refers to the fixed salary of the supervisor. However, the supervisor would lose incentive payments in his normal work amounting to £2,500. It is not anticipated that any replacement costs relating to the supervisor’s work on other jobs would arise.

 

Applying relevant costing principles discuss whether to accept the special order or not. Answer this question based on a statement showing relevant profits / losses. Stating your reasons and all assumptions.

 

Show all necessary notes, formula and workings. Keep two decimal places for all results in your calculations.