Sample question with answer Please write process

XYZ company has annual productive capacity of 75,000 units per year. Budgeted operating results for 2020 are as follows :

Sales [70,000 units @ $ 15

Variable costs:

Manufacturing (75,000 @ 3.80)

Selling (70,000 @ $0.65)

Fixed Cost

Manufacturing $120,000

Selling & administrative $ 75,000

Show all your workings

A wholesaler from another country wants to buy 4000 units at a price of $10 per unit. All fixed cost will remain within the relevant range. Variable manufacturing costs would be the same per unit , but variable selling cost would increase by $1.50 per unit for the special order only

REQUIRED

1. Determine whether the company should produce the special order.

2. Assuming XYZ company's objective is to maximize profit , if the customer wants a special order of 10,000 units , should XYZ company accept or reject special order

EXPLANATION & SOLUTION

Notes to the question

A. When tackling a question on special order it is very important to consider : does the company has the capacity to accept the order or there will be opportunity cost involved

B. Reasoning must be based on the format :

Sales Revenue

(VC) Variable cost

CM Contribution Margin

(FC) (Fixed Cost)

OP Operating Profit

Decision will be based on incremental variation or increase of CM. If the CM increases, it means the order can bring more profit by accepting the order