Reference no: EM132783180

Question - Office Stationery Ltd. manufactures and sells professional diaries. The normal selling price of the diaries are $12.00 per unit. A new offshore customer has placed an order to purchase 15,000 diaries at an offer price of $7.00 per unit which is quite low compared to its normal selling price. The new customer is geographically separated from the company's other customers, and existing sales and prices are not likely to be affected by the new sales. Office Stationery Ltd has a set up capacity to produce 82,000 units. However, it only produces and sells 65,000 units due to lack of sufficient demand in local market. The unit production cost information for the diaries is as follows:

Direct materials $3.10

Direct labour 2.25

Variable overhead 1.15

Fixed overhead 1.80

Total $8.30

The existing manufacturing activities will remain unchanged and fixed overhead costs will remain unchanged if the special order is accepted

Required -

i. By how much the company's total profit increase or decrease if Office Stationery Ltd accepts the offshore order? Should it accept the special discounted offer? Why?

ii. What is the significance of the fact that existing sales and prices will not be affected by the special sale? Is it a relevant information for decision making in this case? Would your decision in (i) above change if existing sales and prices were affected by the special sale? Why?

iii. Suppose the offshore customer wants to have its company logo affixed to each diary using a label. Office Stationery Ltd would have to purchase a special logo labelling machine that will cost $12,000. The machine will be able to label the 15,000 units and then it will be scrapped (with no further value). No other fixed overhead activities will be incurred. In addition, each special logo requires additional direct materials of $0.20.

Should Office Stationery Ltd. accept the special order with the additional requirement? By how much will profit increase or decrease if the order is accepted?