E19.24 Special order: manufacturer LO 18.4 International Chemical Company (ICC) recently received an order for a product that it does not 19.5 normally produce. Since the company has spare production capacity, management is considering accepting the order. In analysing the decision, the assistant accountant is compiling the relevant costs of producing the order. Production of the special order would require 6000 kilograms of theolite. International Chemical Company does not use theolite for its regular product, but the firm has 6000 kilograms of the chemical on hand from the days when it used theolite regularly. The theolite could be sold to a chemical wholesaler for $21 750. The carrying amount of the theolite is $3 per kilogram. International Chemical Company could buy theolite for $4.80 per kilogram. K., Smith, D., Andon, P., Hilton, R., & Thorne, H. (2021). Management accounting. McGraw-Hill Education (Australia) Pty Limited. ynash on 2024-05-15 12:53:33. PART 4 Information for creating value Required 1. What is the relevant cost of theolite for the purpose of analysing the special order decision? 2. Discuss each item of numerical data given in the exercise with regard to its relevance in making the decision. P19.34 Special order; financial and production considerations: manufacturer Mercury Skateboard Company manufactures skateboards. Several weeks ago, the firm received an inquiry from Venus Ltd. Venus wants to market a skateboard similar to one of Mercury's, and has offered to purchase 11 000 units if the order can be completed in three months. The cost data for Mercury's Champion model skateboard are: LO 19.5 Direct material Direct labour (0.1875 hours @ $36 per hour) Total manufacturing overhead: (0.5 machine hours @ $60 per hour) 30.00 $61.35 Total , K., Smith, D., Andon, P., Hilton, R., & Thorne, H. (2021). Management accounting. McGraw-Hill Education (Australia) Pty Limited. onash on 2024-05-15 12:54:21. PART 4 Information for creating value The following additional information is available: m The normal selling price of the Champion model is $79.50; however, Venus has offered Mercury only $47.25 because of the large quantity it is willing to purchase. m Venus requires a modification of the design that will allow a $6.30 reduction in direct material cost. m Mercury's production supervisor notes that the company will incur $11 100 in additional setup costs and will have to purchase a special device costing $7 200 to manufacture these units. The device will be discarded once the special order is completed. m Total manufacturing overhead costs are applied to production at the rate of $60 per machine hour. This figure is based, in part, on budgeted yearly fixed overhead of $1 125000 and planned production activity of 60 000 machine hours (5000 per month). m Mercury will allocate $5400 of existing fixed administrative costs to the order as 'part of the cost of doing business'. Required 1. Assume that present sales will not be affected. Should the order be accepted from a financial point of view. That is, is it profitable? Why? Show calculations. 2. Assume that Mercury's current production activity consumes 70 per cent of planned machine- hour activity. Can the company accept the order and meet Venus' deadline? 3. What options might Mercury consider if management truly wanted to do business with Venus in hopes of building a long-term relationship with the firm