. Assuming that the company has an offer from Royal Company to buy 20,000 units of the product at 90 per unit and the company can still accommodate this additional orders. You have reviewed the following components of variable costs and fixed costs.

Variable Costs consist of:

Direct Materials - 40.00

Direct Labor 25.00

Variable Selling and administrative cost 5.00

Total 70.00

The total fixed costs consist of fixed manufacturing overhead of 800,000 and fixed selling and administrative expenses. The fixed manufacturing overhead was budgeted at the beginning of the year and this is intended for 50,000 units. The company determined that 50% of the fixed manufacturing overhead is necessary for the production of the product.

Furthermore, 20% of the variable selling and administrative costs is attributable to the insurance, shipping and transportation costs of the product.

Required:

(a) What is the predetermined overhead rate? How much is the unit product cost under job-order costing?

(b) In making strategic decision whether to accept or reject the offer, what are the costs that are relavant What will be your recommendation, to accept or to reject the special order? If the order is accepted, by how much will be profit? Show your solution.