Reference no: EM132635159

Question - One of Dove Ltd's customer, Mrs. Zeta has asked them to quote a price for their urgent-order, however she has offered to pay a price of $150,000 for the urgent-order if it is acceptable to Dove Ltd.

As the Management Accountant of Dove Ltd, you are required to advice the management on appropriate pricing and the extra profits that the company can make if this urgent-order is undertaken.

Note: All calculations to ascertain the incremental profits must be clearly shown in your report.

Information to assess the financial viability of the urgent-order by Dove Ltd is given below.

Materials - This urgent-order will require three types of material, MatX, MatY and MatZ.

Material MatX - the amount of this material required for this order is 3,500 liters. This material is used on a daily basis in the production department for of their existing products. The warehouse in Dove Ltd premises currently holds 2,200 liters of this material, which was bought at a price of $12.00 per liter a couple of months ago from Dice Ltd. This supplier has recently increased the price of this material by 30% due to market shortage and COVID-19 pandemic issues. Dove Ltd has searched for two potential suppliers who can deliver identical material MatX, as detailed below:

1) Joy Co. - charges a price of $15.00 per liter which includes delivery charges of $3,000 for 1,000 liters.

2) Nazin Ltd - charges a price of $14.00 per liter and delivery charges of $2,000 for 1,000 liters which are excluded from its usual price list.

Material MatY - the urgent-order requires 2,500 kg of these material. The warehouse currently holds 5,000 kg of this material which was bought two months ago for $11 per kg. It is now found that the inventory of Material MatY which is in the storage is of inappropriate grade for any of the company's current work and as such, the next best alternative is to sell-off these material at whatever price a buyer could offer for them. A potential buyer for Material MatY is found and the agreed gross sales proceeds are $13,200 for all of the inventory available in the warehouse. However, there will be a $400 carriage outward cost to be borne by Dove Ltd for all quantities.

Material MatZ - currently these has limited production usage. However, this material could be used as a substitute for Material Zam. The urgent-order requires 2,000 units of material MatZ. The warehouse currently holds 3,000 units of material MatZ bought at a total price of $18,000 a few months ago and the total net realizable value of all of these stocks, currently are $15,000. The 3,000 units material MatZ currently held in store could be used in another production-run as a substitute for 6,000 units of Material Zam, which is not held in stock at the moment but can be bought at a price of $9/unit.

Labour Costs

The urgent-order will need 500 hours of skilled labor to complete the order. However, these skilled labor hours are currently working at full capacity in producing and selling a current product that has a contribution to sales ratio (C/S ratio) of 35%, a selling price is $700 per unit, labor rate of $50 per hour and the labor cost is $200.00 per unit. The company has an option to either hire the 500 hours externally at a higher rate of $55.00 per hour or to take the 500 hours from current product.

Machining costs

A special cutting machine costing $300,000 will need to be hired for this urgent-order at a flat hiring rate of $600 per week. The special order will take 4 weeks to complete.

Power and maintenance expenses currently incurred is $3,500 per week. This will increase by 10% per week if the urgent-order is accepted.

Delivery costs

Bulk packing is required and the transport costs related to the urgent-order will increase. The following information is given as regards to delivery:

Salary of existing driver: $900/week, Fuel charges: $400/order, Packer's over-time allowances: $300/week, Bulk packing materials: $2,000 and Servicing charges: $600/order.

General Production costs

The general production overhead is absorbed on a labor hour basis and the production overhead absorption rate is established at $30.00 per skilled labor hour. The general production overhead costs actually incurred and paid for as a result of the urgent-order are expected to increase by $400 per week.

Profit Margin

Dove Ltd expects a profit margin of 20% of all urgent-orders under taken.

Required -

a) Discuss the concept of relevant and irrelevant costs in much detail.

b) Show all detail calculations and provide detailed explanation for all relevant costs and irrelevant costs related to the urgent-order of Dove Ltd. You are required to ascertain the minimum price that Dove Ltd can charge their client. How much incremental profit can Dove Ltd make from this urgent-order? State on what basis will the special-order to be accepted or rejected?