The variable cost per unit of production for Product KMP2 is $310 made up as follows:

Details $

Direct materials 100

Direct labour (3 hours) 120

Variable overheads 90

Total 310

There is great demand for the product which sells for $500 per unit. During January 2018 the company was operating at full capacity and no extra time could have been made available. A customer made a request for the company to manufacture a special order. The customer was willing to pay $3,500,000 for the order. Direct materials relating to the order would cost $400,000 and 10,000 labour hours would be needed to complete the order.

Required:

(a) What is the limiting factor involved in the production of KMP2? Explain your answer.

(b) Show by way of calculations, whether or not the acceptance of the order would be profitable to the company.

(c) What is opportunity costs?

(d) By referring to your calculations above, explain why the company producing KMP2 has to consider opportunity costs when deciding to accept an order from a customer.