Coved Ltd has been approached by one of their valued customer ABC Co. to quote a reasonable price for an urgent-order that they are requesting. As the Management Accountant of Coved Ltd, you are required to advice the management on the incremental profits or even losses that the company will make if this special-order is accepted.

Note: All calculations to ascertain the incremental profits must be clearly shown in your report.

Information to assess the financial viability of the urgent-order by ABC Co. is given below.

Materials -This urgent-order will require three types of material, MR, MS and MT.

Material MR - the amount of material required for this order is 10,500 liters. This material is used on a day-to-day basis by the production department for of their existing products. The warehouse of Coved Ltd currently holds 3,200 liters of Material MR, which was bought at a price of $17.00 per liter two months ago from Ace Ltd. The current suppliers of Material MR, has recently increased the price of this material by 20% due to shortage in the market and rising fuel costs. Coved Ltd has sourced for two potential suppliers who can deliver identical material MR, as detailed below:

1) Jane Ltd - charges a price of $14.00 per liter and delivery charges are $3,000 for 1000 liters.

2) Amazon Ltd - charges a price of $16.00 per liter and delivery charges are $2,000 for 1000 liters are included in its price list.

Material MS - the urgent-order requires 4,500 kg of Material MS. The warehouse currently holds 8,000 kg of Material MS which was bought two months ago for $8 per kg. It is now found that the inventory of Material MS in store is of sub-standard quality for any of the current work and as such, the next best alternative is to disposed-off material MS at whatever price a buyer could offer them. A potential buyer for Material MS is found and the agreed gross sales proceeds are $26,400 for all of the inventory available in the warehouse. However, there will be a $500 carriage outward cost to be borne by Coved Ltd.

Material MT - has limited production use currently. However, Material MT could be used as a substitute for Material AX. The urgent-order requires 1,000 units of Material MT. The warehouse currently holds 1,500 units of Material MT bought at a total price of $15,000 a few months ago and the total net realizable value of all these stocks, currently are $13,050. The 1,500 units Material MT currently held in store could be used in another production-run as a substitute for 3,000 units of Material AX, which is not held in stock at the moment and can be bought at a of price of $8/unit.

Labour Costs - The urgent-order will need 300 hours of skilled labor to complete the order. However, these skilled labor hours are currently working at full capacity in producing and selling a current product that has a contribution to sales ratio (C/S ratio) of 40%, a selling price is $500 per unit, labor rate of $20 per hour and the labor cost is $100.00 per unit. The company has an option to either hire the 300 hour externally at a higher rate of $30.00 per hour or to take the 300 hours from current product.

Machinery costs - A special moulding machine costing $200,000 will need to be hired for this urgent-order at a flat hiring rate of $500 per week. The special order will take 6 weeks to complete. Power and maintenance expenses will increase by $150 per week.

Delivery costs - No special packing is required but the transport costs related to the urgent-order will be: Salary of existing driver: $500/week, Fuel charges: $475/order, Packer's over-time allowances: $200/week and Servicing charges: $1,000/order.

General Production costs - The general fixed production overhead is absorbed on a labor hour basis and the production overhead absorption rate is established at $21.00 per skilled labor hour. The general fixed production overhead costs actually incurred and paid for as a result of the special-order are expected to increase by $300 per week.

Profit Margin - The company expects to make a profit margin of 20% of all orders taken.

Prepare calculations and provide detailed explanation for all relevant costs and irrelevant costs related to the urgent-order of Coved Ltd.. You are required to ascertain the minimum price that Coved Ltd can charge their client. How much incremental profit can Coved Ltd make from this urgent-order? State on what basis will the special-order to be accepted or rejected?