Question 3: (10 marks)

Sharjah Corporation manufactures Auto Mobile Cars. Three months ago, the Company got a special-order from Ajman, Inc. Ajman desires to market Auto Mobile similar to Sharjah's design and has offered to purchase 6,000 units. The following data are available:

• Cost data for Sharjah's design: direct materials, $45; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).
• The normal selling price of the car is $180; however, Ajman has offered Sharjah only $115 because of the large quantity it is willing to purchase.
• Ajman requires a change to be made of the design that will allow a $4 reduction in direct-material cost.
• Sharjah's production manager notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units. The device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $35 per labor hour. This figure is based, in part, on budgeted yearly fixed overhead of $1,284,000 and planned production activity of 48,000 labor hours.
• Sharjah will allocate $10,000 of existing fixed administrative costs to the order.

Required:

1. One of Sharjah's staff wants to reject the special order because there is no benefit from the sale. Do you agree with this conclusion Sharjah has excess capacity? Show calculations to support your answer (5 marks)
2. If Sharjah currently has no excess capacity, should the order be rejected from the financial standpoint view? Briefly explain (2.5 marks).
3. Assume that Sharjah currently has no excess capacity. Would outsourcing can be alternative that Sharjah could take into account if management desire to do business with Ajman? Briefly discuss (2.5 marks).

The answer must be with equation and details