Materials - This urgent-order will require three types of material: C, O and T.

Material C - the amount of this material required for this order is 2,000 liters. This material is used on a daily basis in the production department for of their existing products. The warehouse in ABC Co. premises currently holds 1,300 liters of this material, which was bought at a price of $20.00 per liter a couple of months ago from Nico Ltd. This supplier has recently increased the price of this material by 30% due to market shortage and the COVID-19 pandemic issues. ABC Co. has searched for two potential suppliers who can deliver identical material C, as detailed below:

1) Jane Co. - charges a price of $27.00 per liter which includes all delivery charges of a fixed amount of $2,000 for 0 to 4,000 liters.

2) Maze Ltd - charges a price of $24.00 per liter and a fixed delivery charge of $2,000 irrespective of order quantity which are excluded from their usual price list.

Material 0 - the urgent-order requires 3,000 kg of these material. The warehouse currently holds 6,000 kg of this material which was bought two months ago for $12 per kg. It is now found that the inventory of Material O is of inappropriate grade & quality for any of the company's current work and as such, the next best alternative is to sell-off these material at whatever price a buyer could offer for them. A potential buyer for Material O is found and the agreed gross sales proceeds are $54,000 for all of the inventory available in the warehouse.

Material T - currently has limited production usage. However, this material could be used as a substitute for Material TO. The urgent-order requires 1,200 units of material T. The warehouse currently holds 2,400 units of material T bought at a total price of $24,000 a few months ago and the current total net realizable value of all of these stocks are $15,000. The 2,400 units of material T currently held in store could be used in another production-run as a substitute for 2,000 units of Material TO, which is not held in stock at the moment but can be bought at a new price of $12/unit.

Question

Madam Chan has asked their supplier, ABC Co. to quote a price for her urgent-order. As the Management Accountant of ABC Co. you are required to advice the management on the additional profit that the company can make if Madam Chan's urgent-order is accepted and done.

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 is given below.

Labour Costs The urgent-order will need 1,000 hours of skilled labor to complete the order. However, these skilled labor hours are currently working at full force in producing and selling a current product that has a contribution to sales ratio (C/S ratio) of 40%, a selling price is $800 per unit, labor rate of $40 per hour and the labor cost is $200.00 per unit. The company has an option to either hire the 1,000 hours externally at a higher rate of $70.00 per hour or to take the 1,000 hours from current product. Plant & Equipment costs

A special cutting machine costing $300,000 will need to be hired for this urgent-order at a flat hiring rate of $400 per week. The special order will take 4 weeks to complete. Power and maintenance expenses currently incurred is $5,000 per week. This will increase by 10% per week if the urgent-order is accepted.

Packing & Delivery costs Bulk packing is required and the transport costs related to the urgent-order will increase. The following information is given as regards to delivery: Salary of existing driver: $1,000/week, Fuel charges: $1,00/order, Packer's over-time allowances: $300/week, Bulk packing materials: $4,000 and Servicing charges: $400/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 $30.00 per skilled labor hour. The general fixed production overhead costs actually incurred and paid for as a result of the urgent-order are expected to increase by $700 per week.

Required: Show all detail calculations and provide detailed explanation for all relevant costs and irrelevant costs related to the urgent-order of ABC Co.

You are required to ascertain the minimum price that the company can charge their client. How much incremental profit can ABC Co. make from this urgent order? State on what basis will the urgent-order to be accepted or rejected?