Excess Limited makes a product that has the following unit costs:

Direct materials$15

Direct labour12

Variable overhead8

Fixed overhead12

Total unit costs47

Although production capacity is 800,000 units per year, the company expects that demand will be 650,000 units. Fixed selling costs are expected to be $1,500,000 and variable selling costs, $4 per unit relating to transportation.

A customer has offered to buy 50,000 units for $45 each and promises to pay the transportation charge for the units purchased. Excess Limited normally sells its products for $70 each.

Required:

I.Advise Excess Limited on whether to accept the special order - clearly stating the reason for selection.Show all workings including the effect on profit.[10 marks]

II.State three reasons a company may accept a special order.[3 marks]

B.Athem Corporation produces and sells curling iron. Costs associated with manufacturing 10,000 irons are as follows:

Direct materials$120 x 10,000 = 1,200,000

Direct manufacturing labor$480 x 10,000 = 4,800,000

Variable manufacturing overhead$240 x 10,000 = 2,400,000

Fixed manufacturing overhead$300 x 10,000 =3,000,000

Total11,400,000

The product normally sells for $1600 per unit. The managing director is contemplating outsourcing the production of the curling iron with Artery Limited for $960 per unit. The company also note that one-third of the fixed manufacturing overhead would be avoided if the company choose to outsource. As the management accountant, you are asked to do an analysis and inform the managing director.

Required:

I.Should the company continue to produce the product inhouse or outsource from Artery Limited? Provide an analysis to support your decision.[12 marks]

II.Give two reasons a company may choose to outsource production rather than producing the product inhouse.[2 marks]