Tooling Ltd manufactures toolboxes. Company is operating at 60% of its normal capacity. It sells the toolboxes at $10 each. An income statement for the year ended 30 June 2021 is as follows:

	$	$
Sales (60 000 @ $10) Less costs: Direct materials Direct labour Fixed manufacturing overheads Variable manufacturing overheads Selling and administration costs Profit	120 000 180 000 90 000 30 000 80 000	600 000 (500 000) $ 100 000

Auto Mart, an automobile company, has offered to purchase 40 000 toolboxes modified to their specifications. The tool boxes will differ significantly from usual design and the buyer will market the toolboxes under its own private label. Thus, these tool boxes will not compete with Tooling Ltd.s regular toolboxes.

Auto Mart has offered Tooling Ltd $5.50 per toolbox. Direct labour and overheads will be at the same unit cost as Tooling Ltds regular toolboxes. Direct materials will amount to $1.50 per toolbox. Shipping costs to be paid by Tooling Ltd is 10 cents per tool box.

Required:

a) Should the special order be accepted from a financial point of view? That is, is it profitable?

Show calculations. (5 marks)

ANSWER a):

b) Can Tooling Ltd accept this order, given its current capacity? Show calculations. (2 marks)

ANSWER b):