Syarikat Kota Mesin has been in operation for many years to supply the heavy machinery to sago making companies in Sarawak. Lately there have been few discoveries of sago by-product, and not only the common flour, that is currently being produced by the existing machine. The supply of this machinery is tailored-made to customer specifications. The company operated at 80% of practical capacity during the year ended, with the following results.

RM'000

Share Revenue

38,500

Less Sales Commission

3,850

Net Sales

34,650

Expenses:

Direct materials

8,500

Direct Labor

7,050

Manufacturing overhead - variable

1,760

Manufacturing overhead - fixed

4,750

Corporate administration - fixed

3,375

Total costs

25,435

Income before taxes

9,215

Income taxes 25 %

2,304

Net Income

6,911

Syarikat Kota Mesin, which expects continued operations at 80 % of capacity, recently submitted a bid of RM205,500 of a specially-made machinery for a major sago operator, Sago Ever Enterprise. In deriving the quotation amount, Syarikat Kota Mesin used a pricing approach based on last year operation results. The calculations are as follows:

RM

Estimated Direct materials

39,960

Estimated Direct Labor

72,000

Estimated Manufacturing overhead at 40% of direct labor

28,800

Estimated Corporate administration at 10% of direct labor

7,200

Estimated Total costs excluding sales commission

147,960

Add 25% for profit and taxes

36,990

Suggested price (with profit) before sales commissions

184,950

Suggested total price: $74,250/0.90 to adjust for 10% commissions

205,500

Required:

a. Calculate the financial effect the order would have on Syarikat Kota Mesin's net income if the RM205,500 bid is accepted by Sago Ever Enterprise.(5 marks)

b. Assume that Sago Ever Enterprise rejects Syarikat Kota Mesin's bid but stipulates that it is willing to pay RM152,000 for the machinery. Should Syarikat Kota Mesin manufacture the machinery for the counter-offer of RM152,000 from Sago Ever Enterprise? Explain your answer and show calculations.(5 marks)

c. At what bid price will Syarikat Kota Mesin break even on the order? (5 marks)

d. Explain how the profit performance in the coming year would be affected if Syarikat Kota Mesin accepted all of its work at prices similar to Sago Ever Enterprise's RM152,000 counter-offer described in requirement (2).(5 marks)

e. In a bidding situation, what are the assumptions to be fulfilled, in order that the short-term incremental cost shall be covered.