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Window Macros SharePoint Question 31 The Award-Plus
Window Macros SharePoint Question 31 The Award-Plus.Company manufactures.medals-for-winners of athletic-events and other contests. Its. manufacturing plant has the capacity to produce 10000-medals-each-month. Current production and sales.are-7°500 medals-per month. The company normally charges-R150-per-medal.-Cost-information for the current activity-level-is as follows: 1 1 Variable costs-that-vary-with-number of units produced 1 ..........Direct materials i R2625001 ..........Direct-manufacturing.labourg R300-0000 Variable costs (forsetups, materials handling, quality control, and so on): R75-000da that vary with number of batches, 150 batches-x.R500-per-batch) Fixed manufacturing costsu R275-000 Fixed marketing costs a R175-000da Total costs R1087-5000 1 Award-Plus- has just received a special one-time-only.orderfor-2500 medals at R100 per medal. Accepting the special order-would- not affect the company's regular business. Award. Plus.makes: medals for its existing customers-in-batch-sizes of 50-medals-(150 batches-x-50 medals per batch-=- 7°500-medals). The special-order-requires-Award-Plus-to-make-themedals-in-25-batches of 100 each. 1 Required: 1 + Should-Award Plus accept this special order? Show your calculations. 1 3.2 + Suppose plant capacity were only 9000 medals instead of 10000 medals.each month. The special order must either be taken in full or rejected completely. Should Award Plus accept the special-order? Show your calculations. 1
Expert Solution
Amounts are in "R"
Part 1 :
To decide on whether to accept or not, we have find the total variable cost of producing 2,500 units
Material cost per unit = 262,500/7,500 = 35
Labour cost per unit = 300,000/7,500 = 40
Computation of Variable Costs
Material Cost (2,500 x 35) = 87,500
Labour cost (2,500 x 40) = 100,000
Variable OH (25 batches x 500) = 12,500
Total Variable Cost = 200,000
Revenue (2,500 x 100) = 250,000
Profit = 50,000
As we generate profit, we will accept the offer
Note : We will not consider the fixed costs as they are irrelevant for this decision making.
Part 2 :
If the plant capacity is just 9,000 units then we have a capacity constraint as the total available capacity is 9,000 units off which already 7,500 units capacity is occupied. Only 1,500 units capacity is free, if we want to produce 2,500 units we have to forgo profit we earn on 1,000 units sold to outside customers.
It becomes the opportunity cost. Opportunity cost means the cost of choosing one action over other action. Profit forgone by giving those 1,000 units to Award plus company and not to outside customers
Variable cost of units sold to outside customers
Material cost (1,000 x 35) = 35,000
Labour cost (1,000 x 40) = 40,000
Variable cost (20batches x 500) = 10,000
Total cost = 85,000
Total revenue (1000 x 150) = 150,000
Profit = 65,000
Opportunity cost = 65,000
But the profit we get from that order is 50,000
So we deny the offer, it the total capacity available is 9,000 units
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