QUESTION 2

Namibia Products produces and sells hockey sticks for N$32 per stick. The company has capacity to produce 50 000 sticks. The following are the costs that are incurred by the company when operating at full capacity:

DETAILS	PER STICK (N$)	TOTAL (N$)
Direct material Y	12	600,000
Direct labour	3	150,000
Variable manufacturing overheads	1	50,000
Fixed manufacturing overheads	5	250,000
Variable sales expenses	2	100,000
Fixed sales expenses	4	200,000
TOTAL COST	27	1,350,000

The Hockey Association of Namibia has approached the company for the production of 10 000 Lekker sticks. Lekker sticks should meet specific requirements in order to comply with international standards. They are willing to pay a fixed amount of N$5.00 for each stick and furthermore they will reimburse Namibia Products for their manufacturing cost per unit (variable and fixed), as listed above. They will also pay the fee of the graphic designer. Specifications for the special order: For the manufacturing of the special Lekker sticks, the company must use material Y. Namibia Products has this material Y in inventory.

Namibia products would have used this material Y in their normal production of hockey sticks. The cost price of this inventory is N$120 000 (N$12 per stick). The net realisable value of the inventory is N$10.50 per stick. The replacement value (new purchase price) of the inventory is N$180 000 (N$18 per stick) The special hockey sticks have to be printed with a specific logo, but the association has not yet decided on a layout. Part of the order is to hire a graphic designer to design this logo. Her tariff per hour is N$220 and her quotation indicates that she will need 18 hours to complete the design. The printing on the stick must be done by a ZAP-SNAP 564 machine. Currently one stick needs 0.5 hours at an absorption rate of N$0.50 per hour. The Lekker stick requires 0.8 hours at the same absorption rate per hour. These printing allocation costs are included in the variable manufacturing overhead of N$1.00 per stick indicated above. For the 10 000 hockey sticks, Namibia Products will save 70% of the variable sales expenses. Due to the aging of the machines, the company can only manufacture and sell 45 000 units currently. The association does not accept part of the order, it has to be full order or Namibia Products has to reject the whole order.

REQUIRED:

2.1) Calculate the current net profit before the special order is taken into account. Your answer should follow the variable costing format.

2.2) Calculate the minimum price (excluding the fixed cost of N$5) per stick, Namibia products should ask the hockey association for each stick.

2.3) Calculate the total amount that the hockey association will pay for the 10 000 soccer balls? With reference to your answer in (2.2), should Namibia Products accept or reject this special order?