Q3. MS Company manufactures special steel tea sets. Its normal capacity is 100,000 tea sets per year. The Company is able to utilize only 60% of its capacity due to recession in domestic market. Current selling price of each tea set is $1,000. Annual Fixed Cost is $12,000,000. The cost schedule at capacity of 60,000 sets is:

Answer

Cost itemPer set ($)Total (000,000)

Materials ( kg @ $400 per kg) $ 300$18

Labor (10hr @ $20 per hr) 20012

Variable overhead (10hr@10 per hr) 1006

Total Variable cost 60036

Total Fixed Cost20012

Total Cost80048

Let us assume that the company receives an offer from SS Company of Singapore to 20,000 tea sets at a price of 700/seats. If the order is accepted, the company will have to incur an expenditure of $500,000 on handling, transportation etc.

Required: Should the company accept the offer?