Bumi Bhd produces and sells an exclusive ball pen named Pro-10. The company operates at its normal capacity of 30,000 units per year. Costs associated with this level of production and sales are as follows:

Cost per unit Total

(30,000 units)

RM RM

Direct materials 15 450,000

Direct labour 8 240,000

Variable manufacturing overhead 3 90,000

Fixed manufacturing overhead 9 270,000

Variable selling expenses 4 120,000

Fixed selling expenses 6 180,000

Total cost 45 1,350,000

The product is sold for RM50 each. Fixed manufacturing overhead is constant at RM270,000 per year within the range of 25,000 to 30,000 units of Pro-10 per year.

Required:

Due to Covid-19 pandemic, Bumi Bhd expects to sell only 25,000 units of Pro-10 through regular channels in 2021, therefore it will have a spare capacity of 5,000 units. Assuming the following special orders have been received by the company in 2021.

a. Star Sdn. Bhd. has offered to purchase 5,000 units of Pro-10 if Bumi Bhd. willing to sell at a 16% discount off the regular selling price. There would be no sales commissions on this order; thus, variable selling expenses would be reduced by 75%. However, Bumi Bhd. would have to purchase a special machine to engrave Star Sdn Bhd's name on the 5,000 units. This machine would cost RM10,000. Bumi Bhd. has no assurance that Star Sdn. Bhd will purchase additional units in the future. Evaluate the impact on the company's profit if this special order is accepted by Bumi Bhd. (10 marks)

b. The Ministry of Defense Malaysia (MinDef) would like to make a one-time only purchase of 5,000 units of Pro-10. MinDef would pay a fixed price of RM1.80 per unit, and it would repay Bumi Bhd for all manufacturing costs associated with the units. MinDef would pick up the product with its own transport, therefore would be no variable selling expenses associated with this order. Advise the management of Bumi Bhd. on whether to accept or reject the order. Prepare the relevant analysis to support your decision. (8 marks)