Reference no: EM132949365

Excess Limited makes a product that has the following unit costs:

Direct materials $15

Direct labour 12

Variable overhead 8

Fixed overhead 12

Total unit costs 47

Although production capacity is 800,000 units per year, the company expects that demand will be 650,000 units. Fixed selling costs are expected to be $1,500,000 and variable selling costs, $4 per unit relating to transportation.

A customer has offered to buy 50,000 units for $45 each and promises to pay the transportation charge for the units purchased. Excess Limited normally sells its products for $70 each.

Required:

Problem I. Advise Excess Limited on whether to accept the special order - clearly stating the reason for selection. Show all workings including the effect on profit.

Problem II. State three reasons a company may accept a special order.