Rankin Company, located in the GTA, manufactures a variety of industrial valves and pipe fittings. Currently the company is operating at about 70 percent capacity and is earning a satisfactory return on investment. Glasgow Industries Ltd. of Scotland has approached management with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Rankin's pressure valve; however, a fire in Glasgow Industries valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $21 for each of the valves. Rankin's product cost for the pressure valve is; Direct Materials $6 Direct labour (0.5 hr per valve) Manufacturing overhead (1/3 variable) 9 8 Additional costs incurred in connection with sales of the pressure valve are sales commissions of 5% and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. Freight expense will be paid by Glasgow In determining selling prices, Rankin adds a 40% markup to product cost. This provides a $32 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at $30 to maintain market share. Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, Rankin will manufacture and ship 30,000 pressure valves to Glasgow Industries each month for the next four months. Required: a. Determine how many additional direct labour hours will be required each month to fill the Glasgow order (2 marks). b. Prepare an analysis showing the impact on profit before tax of accepting the Glasgow order (5 marks). c. Calculate the minimum unit price that Rankin management could accept for the Glasgow order without reducing net income (4 marks) d. Identify and briefly explain the strategic factors that Rankin should consider before accepting the Glasgow order (8 marks) e. Identify the factors related to international business that Rankin should consider before accepting the Glasgow order (2 marks). Rankin Company, located in the GTA, manufactures a variety of industrial valves and pipe fittings. Currently the company is operating at about 70 percent capacity and is earning a satisfactory return on investment. Glasgow Industries Ltd. of Scotland has approached management with an offer to buy 120,000 units of a pressure valve. Glasgow Industries manufactures a valve that is almost identical to Rankin's pressure valve; however, a fire in Glasgow Industries valve plant has shut down its manufacturing operations. Glasgow needs the 120,000 valves over the next four months to meet commitments to its regular customers; the company is prepared to pay $21 for each of the valves. Rankin's product cost for the pressure valve is; Direct Materials $6 Direct labour (0.5 hr per valve) Manufacturing overhead (1/3 variable) 9 8 Additional costs incurred in connection with sales of the pressure valve are sales commissions of 5% and freight expense of $1 per unit. However, the company does not pay sales commissions on special orders that come directly to management. Freight expense will be paid by Glasgow In determining selling prices, Rankin adds a 40% markup to product cost. This provides a $32 suggested selling price for the pressure valve. The marketing department, however, has set the current selling price at $30 to maintain market share. Production management believes that it can handle the Glasgow Industries order without disrupting its scheduled production. The order would, however, require additional fixed factory overhead of $12,000 per month in the form of supervision and clerical costs. If management accepts the order, Rankin will manufacture and ship 30,000 pressure valves to Glasgow Industries each month for the next four months. Required: a. Determine how many additional direct labour hours will be required each month to fill the Glasgow order (2 marks). b. Prepare an analysis showing the impact on profit before tax of accepting the Glasgow order (5 marks). c. Calculate the minimum unit price that Rankin management could accept for the Glasgow order without reducing net income (4 marks) d. Identify and briefly explain the strategic factors that Rankin should consider before accepting the Glasgow order (8 marks) e. Identify the factors related to international business that Rankin should consider before accepting the Glasgow order (2 marks)
