Reference no: EM132464113

Problem - Shining Ltd is in the business of production and sale of trophies, used for competitions and ceremonial events. The current production capacity of its manufacturing facility is 120,000 trophies per annum, spread evenly over the year. However, the plant is currently only operating at 75% of its production capacity. The normal selling price of the trophies is $225 per unit.

The current monthly cost information is extracted as follows:

Direct materials $300,000

Direct labour $375,000

Variable selling and administrative $187,500

Fixed manufacturing overhead $275,000

Fixed selling and administrative $225,000

The company has just received a special one-time order for 2,500 trophies at $115 per trophy. For this particular order, no variable selling and administrative costs would be incurred. This order is also not expected to have any effect on fixed costs.

Required -

(a) Calculate the average costs per unit before and after accepting the special order. Comment on the relevance of these two (2) costs for decision making purposes.

(b) Using relevant cost principles, calculate for the company the financial effects of this order and advise if the order should be accepted.

(c) Calculate the breakeven selling price per unit for the special order.

(d) Apart from financial factors, discuss three (3) other considerations that should be included in the analysis of whether to accept the special order.