Paulo Alexandrio Ltd [PA] makes numerous lines of men's and women's sleepwear. Senior management has recently been approached by a large department store group to make a special order of children's sleepwear with a movie character theme on the fabric. PA is currently working at 70% of full capacity. The Head of Marketing has estimated the figures for the special order of 5,000 requested by the department store group. He has followed the company policy of full pricing which includes an allocation of selling and administration expenses plus a 15% markup. Other information includes: 

a. Fixed Manufacturing Overhead is normally applied at 80% of direct labour dollars. The annual fixed overhead budget is $400,000 based on 100,000 products at full capacity. 

b. A franchise fee would have to be paid to the movie company to use their name and characters on the Special Order. 

c. Total selling and administration costs are estimated as $100,000 for the current year. These costs are believed to be a function of the total product capacity, therefore, selling and admin costs are applied on products produced. d. At full capacity, PA could choose to outsource the printing, and reduce direct labour on the Special Order by 50%. The franchise fee would then be paid by the external printer. The cost of outsourcing is quoted as $6 per product. 

                                              Cost Per Product                Cost for 5,000 Products

 Manufacturing costs Cloth        $ 3.00                              $ 15,000.00 

Buttons                                    $ 1.00                                   $ 5,000.00 

Franchise Fee & Printing         $ 5.00                                $ 25,000.00 

Direct Labour                            $ 5.00                               $ 25,000.00 

VMOH                                   $ 1.50                                    $ 7,500.00 

FMOH                                                                              $ 20,000.00 

Selling & Admin                                                               $ 5,000.00 

Total                                                                                 $ 102,500.00 

OFFER                                                                                 $ 80,000.00

Required: 

1. a. If the department store offered $80,000 for the 5,000 extra products, should PA accept the order when it is working at 70% capacity, i.e. 70,000 products? Show your workings in full.

 b. Explain the process that you have used and results in 100 words. [10 + 10 = 20 marks] 

2. a. How would your answer change if at all, if PA is currently operating at full capacity with confirmed sales for all products? Show your workings in full. 

b. Explain the process you have used and results in 100 words. [10 + 10 = 20marks]

 3. a. At full capacity, what if PA outsourced the printing, and reduced direct labour on the Special Order by 50%? The franchise fee would then be paid by the printer. The cost of outsourcing is quoted as $6 per unit. Is this beneficial to the company? Show your workings in full.

 b. Explain the process you have used and results in 100 words. [10 + 10 = 20 marks]

 4. What else would you want to consider in making this decision for Q.3? Discuss in 100 words. [10 marks] 

5. Senior Management is really interested in continuing the children's sleepwear lines with movie characters for future production. What ideas could you propose to improve the profitability of those products?