Reference no: EM132548911

MUNA Company manufactures a single product called elu that is sold currently at Br. 15 each. The present production and sales is 15,000 units per month representing 75% of the capacity available.

The Br. 10.50 per unit cost of this product based on the current production and sales level follows:

Direct materials Br. 4.00

Direct labor 2.50

Factory overhead 2.00

Variable selling expense 1.50

Fixed administrative expense 0.50

The only variable selling expense is a sales commission that is 10% of the selling price paid to MUNA's sales staff. Of the Br. 30,000 overhead costs needed to produce MUNA's product, the fixed costs included in it amounts to Br. 22,500.

A number of questions relating to the production and sale of elu are given below. Each question is independent unless stated.

Instructions:

Question a. DEZDI Company has approached MUNA with an offer to purchase 5,000 units per month at Br. 9.00 per unit. No sales persons are involved in soliciting this sale. Should the company accept or reject the offer? Why?

Question b. Suppose the special order in (a) above was for 8,000 units instead of 5,000 units. Thus, regular sales would be reduced as needed because the company could not expand capacity in the short-run to accept the special order. Should the special order be accepted assuming all other factors are still the same? Assume DEZDI, the purchasing firm, has offered Br. 9.00 per unit

Question c. Refer requirement (b) above. Assume that instead of reducing the regular sales the company can remove the capacity constraint by installing necessary balancing equipment and also working overtime to meet both regular sales and specials sales order. This will increase fixed costs by Br. 8,000 monthly, and additional cost for overtime work will amount to Br. 4,000 for the month. Would this change your answer to part (b) above? Why? All other factors are still unchanged

Question d. An outside manufacturer has offered Br. 8.35 to produce and ship elu directly to the MUNA Company's as sales orders are forwarded from MUNA's sales staff. If MUNA accepts this offer, the fixed overhead costs would continue at two-third of their present level and the fixed administrative expenses will drop to Br. 4,500. Should the company make or buy the product? If MUNA accepts this offer, it will be able to rent some of the facilities it devotes to making the part to another firm for Br. 15,250 monthly.