Q. No. 3

Max Marks - 10

ACCEPTANCE OR REFECTION OF SPECIAL ORDER

The Rafan Company manufactures a product which is sold at Rs.16 each. Under present business conditions, the company is operating at 30% normal capacity with production and sales of 8,000 units per month. An analysis of costs for a recent month sows:

Direct Materials	Rs. 10,000
Direct Labor	12,000
Superintendents salary	5,000
Depreciation Building	2,000
Heat and light	500
Indirect labor	6,000
Deprecation of machinery	3,000
Machinery Repair	1,000
Fire Insurance	1,500
Miscellaneous	8,00
Factory Rent	5,000
Property Tax	400
Total	Rs. 47,200

The total marketing expenses were Rs. 50,000, which included 3,000 for packing and shipping. The sales on the special order would require a similar unit cost for packing and shipping. The total administrative and general costs were Rs. 7,000.

An offer has been received from a large chain store to purchase 120,000 units to be shipped in equal months each month during the coming year. These units would be manufactured with slight immaterial modifications under the chain stores label. The price offered was Rs. 6.5 per unit.

The Rafan Company management does not expect any improvement in business conditions and feels that the chain stores sales will not affect Rafan sales. The management does not believe that it can afford to accept this offer, feeling that it would reduce the present operation profit.

Required:

An analysis required comparing the operating results, if the order is or is not accepted. Also Assume that the various items are either completely fixed or variable, depending upon the dominant characteristics of each item and the data given.