Question 5

The following total cost data are for Akoto Manufacturing Company, which has a normal capacity per period of 10,000 units of product that sell for GHS30 each. For the foreseeable future, sales volume should continue at normal capacity of production.

GHS

Raw material 72,000

Direct labour 48,000

Variable overhead 24,000

Fixed overhead (Note 1) 36,000

Selling expense (Note 2) 30,000

Administrative expense (fixed) 9,000

219,000

i. Beyond normal capacity, fixed overhead costs increase GHS1,000 for each 500 units or fraction thereof until a maximum capacity of 14,000 units is reached.

ii. Selling expenses are 10% sales commission plus shipping costs of 50 pesewas per unit. Akoto pays only one-half of the regular sales commission rate on any sale of 500 or more units.

Akotos sales manager has received an order for 1,200 units from a large discount chain at a special price of GHS27 each, F.O.B. factory. The controllers office has furnished the following additional cost data related to the special order:

i. Changes in the products construction will reduce raw materials GHS3 per unit.

ii. Special processing will add 25% to the per-unit direct labour costs.

iii. Variable overhead will continue at the same proportion of direct labour cost.

iv. Other costs should not be affected.

Required

a) Present an analysis supporting a decision to accept or reject the special order. Assume Akotos regular sales are not affected by this special order.

b) What is the lowest unit sales price Akoto could receive and still make a before-tax profit of GHS2,000 on the special order?