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5.44 - strategic factors need to be considered.These...

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( a ) The revevant cost are those that changes if the order is accepted .These costs would consist of the variable activity costs( resources acquired as needed ) plus any cost of acquring additional activity capacity ( resources acquired in advance of usage).The income will change by the following amount: Revenue (Rs.10 x 2,000 units) Rs.20,000 less : Increse in resource spending Direct material ( Rs.3 x 2000 units ) Rs.6,000 Direct labour ( Rs.7 x 400 Direct labour hours ) 2,800 Setups [Rs. 50 x 100 hours ) + (Rs.8 x 25 hours ) 5,200 machining ( Rs.1 x 4,000 machine hours ) 4,000 18,000 Income change Rs. 2000 Special orders need to be examined carefully before acceptance.The order offers an increase in income of Rs.20,000, but it does require expansion of the setup activity capacity-- perhaps a recurring annual commit- ment of Rs. 5,000 for the future , unless there is some certanity that special orders will be forthcoming in future years as well. The special order may be accepted , as the company is suffering from idle capacity .Other
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Unformatted text preview: strategic factors need to be considered .These include -● Will this order affect any regular sales ? ● Is the company looking for a permanent solution to its idle-capacity or are special orders becoming habit -- a response pattern that may be eventually prove disastrous ? ● Will acceptance adversely affect the company's normal distribution channels ? ● Will it be an opportunity for the company to explore the new market for its other products ? ● Can this be taken as the company's penetration pricing policy for the new market ? ● Any reaction from competitors in the new market ? (b ) The special order needs only 25 setup hours, whereas the company has 50 hours of excess setup capacity.In this case there will be no need for expansion of capacity with attendant increase in fixed costs.So the total income will increase by Rs.7000 in the order of accepted. Order to be accepted or not...
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