Alexon SL is an electronics business with eight product lines. Profit data for one of the products (XT-107) for the month just ended (June 2008) are as follows:

Sales, 200 000 units at average

price of 100

Variable costs

20 000 000

Direct materials at 35 per unit

7 000 000

Direct manufacturing labour at

10 per unit

2 000 000

Variable manufacturing overhead at

5 per unit

1 000 000

Sales commissions at 15% of sales

3 000 000

Other variable costs at

5 per unit

_1000000

_------------

_{Totalvariablecosts14000000}

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Contribution margin 6 000 000

_{Fixedcosts5000000}

_------------

_{Operatingprofit1000000}

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Xucl Mecniques Fluvi SA, an instruments company, has a problem with its preferred supplier of XT-107 component products. This supplier has had a three-week strike and will not be able to supply Xucl 3000 units next month. Xucl approaches the sales representa- tive, Angela Zamora, of Alexon SL about providing 3000 units of XT-107 at a price of 80 per unit. Zamora informs the XT-107 product manager, Francisco Garca-Salve, that she would accept a flat 

commission of 6000 rather than the usual 15% if this special order were accepted. Alexon has the capacity to produce 300 000 units of XT-107 each month, but demand has not exceeded 200 000 units in any month in the last 

year.

 

Required

1 If the 3000-unit order from Xucl is accepted, what will be the effect on monthly operat- ing profit? (Assume the same cost structure as occurred in June 2008.)

2 Francisco ponders whether to accept the 3000-unit special order. He is afraid of the precedent that might be set by cutting the price. He says, 'The price is below our full cost of 95 per unit. I think we should quote a full price, or 

Xucl will expect favoured treat- ment again and again if we continue to do business with them.' Do you agree with Francisco? Explain.