OBJECTIVE:

To enable learners to identify the relevant costs and benefits from those that are irrelevant pertaining decisions / alternatives from which the alternative with the greatest net benefit may be chosen in aiding decisions-making.

REQUIREMENT:

Short term decision-making

Hills Sdn. Bhd. produces a single product. The cost of producing and selling a single unit of this product at the company's normal capacity level of 40,000 units per month is as follows:

Direct materials..............................................

RM38.80

Direct labor.....................................................

RM9.70

Variable manufacturing overhead.................

RM2.30

Fixed manufacturing overhead......................

RM18.10

Variable selling & administrative expense...

RM1.70

Fixed selling & administrative expense........

RM8.80

The normal selling price of the product is RM81.10 per unit.

A special order has been received from an overseas customer for 3,000 units to be delivered this month at a price below the prevailing normal selling price. This order would have no effect on the company's normal sales and would not change the total amount of the company's fixed costs. The variable selling, and administrative expense would be RM0.20 less per unit on this order than on normal sales. Direct labour is a variable cost in this company.

Required:

a.Suppose Hills Sdn. Bhd. has ample capacity to produce the units required by the overseas customer and the special price on the special order is RM75.30 per unit. By how much would this special-order increase (decrease) the company's net operating income for the month?

b.Suppose the company is already operating at capacity at the time the special order is received from the overseas customer. What would be the opportunity cost of each unit delivered to the overseas customer?

c.Suppose the company does not have enough idle capacity to produce all of the units for the overseas customer and accepting the special order would require cutting back on production of 1,000 units for regular customers. What would be the minimum acceptable price per unit for the special order?