Reference no: EM132617271
Outdoor Campers Sdn Bhd manufactures and sells a single product, a portable gas stove used mainly for outdoor activities such as camping. The company is operating at full capacity and produces and sells 30,000 stoves per year.
The costs associated with this level of production and sales is given in the table below:
Unit Price
RM Total RM
Direct Material 15 450,000
Direct Labor 8 240,000
Variable manufacturing overhead 3 90.000
Fixed manufacturing overhead 9 270,000
Variable selling expense 4 120,000
Fixed selling expense 6 180,000
Total Cost 45 1,350,000
The stove normally sells for RM 50.00 each. Fixed manufacturing cost is constant at RM 270,000 per year within the range of 25,000 to 30,000 units of stove per year.
Required
Assume that due to a recession, Outdoor Campers Sdn Bhd expects to sell only 25,000 units of stove next year. TESCO, a large retail chain has offered to purchase 5,000 units of the stove if Outdoor Campers Sdn Bhd is willing to offer a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expense would be reduced by 75%. However, Outdoor Campers Sdn Bhd would have to purchase a special machine to engrave the retail chain's name on the 5,000 units of stove. This machine would cost RM 10,000. Outdoor Campers Sdn Bhd has no assurance that TESCO will purchase additional units in future.
Problem (i) Determine the impact on profits next year if this special order is accepted.
Refer to the original data. Assume again that Outdoor Campers Sdn Bhd expects to sell only 25,000 units of stove next year. The Ministry of Defense would like to make a one- time only purchase of 5,000 units of stove for the Army. The Ministry of Defense would pay a fixed sum of RM1.80 per unit of stove and it would reimburse Outdoor Campers Sdn Bhd for all cost of production (variable & fixed) associated with the production of the 5,000 units of stove. As the Army would pick up the stoves with its own trucks, there would be no variable selling expenses associated with the order.
Problem (ii) If Outdoor Campers Sdn Bhd accepts the order from the Ministry of Defense, by how much will profits increase or decrease for the year?
Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 units of stove next year. Thus, accepting the Ministry of Defense order would require giving up regular sales of 5,000 units of stove.
Problem (iii) If the Ministry of Defense order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 units of stove is sold as regular sales