Question 6 (7 marks)

Assume Rajan Manufacturing Ltd makes sports vest for local soccer, baseball, basketball, and other sports teams. Rajan, the owner, purchases the vests and prints graphics on the vests for each team. The graphics were designed several years ago, so design costs are no longer incurred. On average, Rajan sells 1,000 vests each month. Typical monthly financial data is shown below:

	Per Unit	TotalMonthly Data at 1,000 Vests
Sales revenue		$20		$20 000
Variable costs:
Direct materials	$8		$8 000
Direct labour	2		2 000
Manufacturing overhead	3	13	3 000	13 000
Contribution margin		$ 7		$ 7 000
Fixed costs (rent, salaries, etc.)				4 000
Profit				$ 3 000

The monthly information provided relates to the company's routine monthly operations. A representative of the local university recently approached Rajan to ask about a one-time special order. The university will be hosting a state-wide soccer event and is willing to pay Rajan'sManufacturing $17 per shirt to make 200 custom vests for the event. Enough idle capacity exists to handle this order; hence, it will not affect other sales.

Rajan requires a modification of the design that will allow a $1 reduction indirect material cost. All other variable costs will be incurred to produce the special order, and he will pay a firm $600 to design the graphics that will be printed on the vests.

This special order will have no other effect on Rajan's monthly fixed costs.

Required:

1. Explain how differential analysis assist managers in evaluating special order decisions? (No calculation required) (2 marks)
2. Which of the data above should be ignored in making the special-order decision? For what reason? (1 mark)
3. Should Rajan accept the special order?Show calculation. (4 mark)