Question 3:

Irbid Company is operating at 80% of its maximum capacity of 50,000 units. The company makes a single product and is selling all of its regular production, and it expects an excellent flow in demand in the near future. The company is considering a proposal to supply 10,000 units to a customer as a special one-time order. The proposed price per unit is JOD 14.5. The regular selling price for this product is JOD 22.5. The per-unit variable costs are as follows:

Variable cost details	Cost per unit
Direct materials	JOD 2.5
Direct labor (based on 1/4 hour)	JOD 6
Variable manufacturing overhead	JOD 1.5
Sales commission	JOD 0.5

Annual fixed manufacturing cost is JOD 72,000. There will be no sales commission or any other administrative costs associated with the special order.

Required:

The CEO of Irbid company asked you as a Senior Manager to advise him on the following issues:

1. Whether the company should take on the proposed special order for 10,000 units at a selling price of JOD 14.5 per unit. (4 Marks).

2. The customer requesting the special order called the next day and asked Irbid company to cut and remove its logo on each unit of the order. This would require an additional 10 minutes of direct labor per unit and the purchase of a special tool for cutting and removing that would cost JOD 7,500. Irbid company would have no use for the special tool after the finishing the special order and it would not have any resale value. What effect would this have on the profitability of the special order? (6 Marks)