Part B

Power Brake Company produces car brake pads which it normally sells to retailers for RM60 each. The cost of manufacturing 25,000 brake pads is:

Materials RM 100,000

Labour RM 300,000

Variable Overhead RM 200,000

Fixed Overhead RM 400,000

Total RM 1,000,000

The company also incurs a 5% sales commission (RM3) on each brake pad sold. VAG Corporation offers Power Brake Company RM42.50 per brake pad for 3,000 units. VAG Corporation would sell the brake pads under its own brand name in foreign markets not yet served by Power Brake Company. If Power Brake Company accepts the offer, its fixed overhead will increase from RM400,000 to RM430,000 due to the purchase of a new imprinting machine. No sales commission will result from the special order.

Instructions:

(a) Prepare an incremental analysis for the special order. (9 marks)

(b) Explain whether Power Brake Company needs to accept or reject the special order. (1 mark)