PROBLEMS ON ACCEPT OR REJECT SPECIAL ORDER DECISION

P – 1. The flexible budget at 80% capacity of Dynamic Company

Ltd. is as follows:
Production in 30,000
units
Sales value Rs.
600,000
Material cost 15,000
Labour cost 105,000
Overhead cost -
Variable 60,000
Semi variable 35,000
Fixed 100,000
An offer of for additional 3,750 units sales is available if it is supplied at
Rs. 7 each. If the semi variable overhead increases only Rs. 1,250 for
the additional production will it be advisable to accept this offer?

P –2. Due to industrial depression a plant is running at present at 50% of its capacity. The following details are
available.
Particulars Cost of production
per unit
Direct material Rs. 2
Direct labour 1
Variable overhead 3
Fixed overhead 2
Total Rs. 8
Production per 20,000 units
month
Total cost of Rs. 1,60,000
production
Sales Rs. 1,40,000
Loss 20,000
An exporter offer to buy 5,000 units per month at the rate of Rs. 6.25
per unit and the company hesitate to accept the order for fear of
increasing its already operating loss. Advice if the company should
acceptor rejects this offer?

P – 3. The uniform product company produces a single product.

Its maximum annual production capacity is 480,000 labour hours.
Currently it is producing at an annual rate of 375,000 labour
hours. Normal volume (the basis of absorption of fixed
overheads) is 450,000 labour hour.
The company has received an offer of 70,000 such units at a special
price of Rs. 12 per unit. The regular selling price is Rs. 15 per unit. The
standard cost sheet of one unit of the product is as follows:

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Direct materials (10 kgs @ Rs. 0.50) Rs. 5.00
Direct labour (1.5 hour @ Rs. 2) 3.00
Variable overhead (1.5 hour @ Rs. 2) 3.00
Fixed overhead (1.5 hour @ Rs. 1) 1.50
Total Rs. 12.50
Required: In the short run, would it be profitable to accept the offer.

P – 4. ITR Ltd. is currently operating at an annual production volume of 750,000 direct labour hours. Its
annual operating capacity, which cannot be increased, is 1,000,000 direct labour hours. Recently JRT Ltd. has
offered to buy 250,000 units of the company’s product at a special price of Rs. 10.50 per unit. The regular
selling price is Rs. 12.90 per unit. The standard cost sheet of one unit of the product appears as under:
Particulars Rs.
Materials (6 kg @ Rs. 0.40 per kg) 2.40
Direct labour (2 hours @ Rs. 2.50 per hour) 5.00
Variable Overheads (2 hours @ Rs. 0.75 per hour) 1.50
Fixed Overheads (2 hours @ Rs. 1.20 per hour) 2.40
Total 11.30
Would it be profitable to accept the offer?

P – 5. Kathmandu Company Ltd. is specialised in the manufacture of

dolls and toys. It receives an order for 1,000 units of children dolls from
a large scale chain store at a price of Rs. 6 per unit. The company sells
this type of doll to its other customers at Rs. 10 each but it has surplus
capacity and can take the special order without affecting adversely its
normal operations for the coming month.
Income statement based on costing records for the preceding month is as under:
Particulars Rs.
Net Sales 5000 units @ Rs. 10 50,000
Variable cost:
Direct material @ Rs. 3 per unit 15,000
Direct labour @ Rs. 2 per unit 10,000
Fixed cost:
Factory overhead 10,000
Selling and Administrative Expenses 10,000
Total costs 45,000
Profit 5,000
Direct material and direct labour to be incurred on the special order are
estimated to be the same per unit as for regular business. Special tools
costing Rs. 500 would be required to meet the specifications of the
chain store. There will be no change in other expenses.
You are required to prepare a differential cost analysis for deciding
about the acceptance of the order.

P –6 6 The Leobl Company is considering the submission of a bid

to an agency of the Defense Department for 50,000 units per
month of its batter-powered fingernail clippers. The design and

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 manufacturing operations for this item for the armed forces
would be the same as for the company's standard commercial
line, which sells at $1.75 per unit.
Geared to a normal capacity of 400,000 units per month, the Loebl
Company has been operating for the last few months at about 300,000
units.
Management has learned informally that competitive bids are ranging
in price from $1.30 to $1.45 per unit. It believes that if it can bid $1.25
per unit, the company can land the contract. It is to quote a price with
terms net, f.o.b. Company's plant.
Pertinent data for current monthly activity are:
Cost item Costs Incurred Budget at
last month normal
(300,000 capacity
units) (400,000 units)
Direct materials $135,000 $180,000
Direct labor 75,000 100,000
Indirect labor 45,000 60,000
Heat, light, power 28,000 36,000
Supervision 55,000 70,000
Depreciation 40,000 40,000
Engineering 20,000 20,000
Sales commissions 21,000 28,000
Packing costs 15,000 20,000
Freight out 15,000 20,000
Office expenses 15,000 15,000
Advertising 19,000 22,000
Miscellaneous administrative 6,000 6,000
Total costs $489,000 $617,000
Required:
a. Determine the desirability of submitting a bid of $1.25 per unit.
b. At what price should the contract be bid to bring monthly total
company operating profit to a level equal to a return of 15 percent
on average monthly operating assets of $350,000 (i.e. average
balance of $4,200,000 dividend by 12)?
c. Comment on other factors affecting the decision.

P – 7. Anchor Company manufactures several different styles of

jewelry cases. Management estimates that during the third
quarter of 19×6 the company will be operating at 80 percent of
normal capacity. Because the company desires a higher
utilization of plant capacity, the company will consider a special
order.
Anchor has received special order inquires from two companies. The
first order is from JCP Inc., which would like to market a jewelry case
similar to one of Anchor's cases. The JCP jewelry case would be

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marketed under JCP's own label. JCP Inc. has offered Anchor $5.75 per
jewelry case for 20,000 cases to be shipped by October 1, 19×6. The
cost data for the Anchor jewelry case which would be similar to the
specifications of the JCP special order are as follows:
Regular selling price per unit $9.00
Costs per unit:
Raw materials
Direct labour 0.5 h @ $ 6.00 $2.50
Overhead 0.25 machine h @ $4.00 3.00
1.00
Total costs $6.50
According to the specifications provided by JCP Inc., the special order
case requires less expensive raw materials. Consequently, the raw
materials will only cost $2.25 per case. Management has estimated
that the remaining costs, labor time, and machine time will be the
same as the Anchor jewelry case.
The second special order was submitted by the Krage Co. for 7,500 jewelry cases at $7.50 per case. These jewelry
cases, as with the JCP cases, would be marketed under the Krage label and have to be shipped by October 1, 19×6.
However, the Krage jewelry case is different from any jewelry case in the Anchor line. The estimated per-unit costs of
this case are as follows:
Raw materials $3.25
Direct labor 0.5 h @ $6.00 3.00
Overhead 0.5 machine h @ $4.00 2.00
Total costs $8.25
In addition, Anchor will incur $1,500 in additional setup costs and will
have to purchase a $2,500 special device to manufacturer these cases;
this device will be discarded once the special order is completed.
The Anchor manufacturing capabilities are limited to the total machine
hours available. The plant capacity under normal operations is 90,000
machine hours per year or 7,500 machine hours per month. The
budgeted fixed overhead for 19X6 amounts to $ 216,000. All
manufacturing overhead cost are applied to production on the basis of
machine hours at $4.00 per hour.
Anchor will have the entire third quarter to work on the special orders.
Management does not expect any repeat sales to be generated from
either special order. Company practice precludes Anchor from
subcontracting any portion of an order when special orders are not
expected to generate repeat sales.
Required: Should Anchor Company accept either special order? Justify
your answer and show your calculations.
P – 8. The long company is currently operating at its full capacity
of 200,000 units annually costs are as bellow:
Direct material Rs. 640,000
Direct labour Rs. 320,000
Variable overhead Rs. 160,000

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 Fixed overhead Rs. 96,000
Fixed sales and distribution expenses Rs. 48,000
Variable selling and distribution exp. Rs. 64,000
The product is sold under long company brand Rs.10. Hari distributors
offer to purchase 80,000 units annually for the next five year at
Rs.6.60 per unit. This offer, If accepted will not affect the current
selling price because Hari distributors will sell under its own brand
name. Acceptance of the offer will have the following results.
 Labour costs on the additional 80,000 units will be 1.5 times the
regular rate.
 Variable selling and distribution expenses will increase by Rs.0.08
per unit on additional unit only.
 The required additional material can be purchased at 5% volume
discount.
 All other cost factors will remain the same.
Required: Should Long Co. accept the offer? Show all your
computations in support of your conclusion.

P – 9. The Kathmandu Soap & Chemical company produces and

sells toilet soap. The income statements at two different levels of
activities are summarized below:
Sales in boxes 50,000 100,000
Sales revenue Rs. Rs.
2,500,000 5,000,000
Less: Cost:
Direct Materials 500,000 1,000,000
Direct wages 500,000 1,000,000
Indirect wages 250,000 500,000
Heat, Light & Power 250,000 350,000
Supervision 250,000 350,000
Depreciation 500,000 500,000
Sales Commission 125,000 250,000
Packing cost (wrapper) 50,000 100,000
Carriage outwards 50,000 100,000
Advertising 50,000 75,000
Administration & other 100,000 100,000
Rs. Rs.
3,475,000 4,325,000
The sales for 1983 were 75,000 boxes and which was only 75% of
capacity available. On January 1st 1984 the Kathmandu Hotel (P) Ltd.
approached the company with a special offer to supply 20,000 boxes of
special brand toile soap at Rs.40.00 per box. The soap was to bear
special hotel monogram and was to have appellant fragrance to the
taste of Hotel guest.
The special device to print hotel monogram will cost additional
Rs.200,000 and special fragrance will increase the materials cost by

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Re. 1 per box. All other fixed cost and materials cost will remain
unchanged.
Required: Should the company accept this special offer? (TU 2041)
P – 10. Purna Enterprises manufactures a variety of office furniture items, including a beautiful Mahogony
desk. A representative of a Middle-Eastern nation approaches the firm with an offer to buy 200 desks at a
price of Rs. 450 each. Normal price is Rs. 600. The production of the 200 desk would not require the addition
of any production facilities or other fixed costs. The following schedule presents cost data pertaining to the
production and sale of Mahogony desks:
Particulars Total costs for
unit
5,000 Cost
Desks
Direct Materials Rs. Rs. 250
1,250,00
0
Direct Labour 5,00,000 100
Manufacturing overhead (40% variable) 7,50,000 150
Variable selling (all commission)* 2,40,000 48
Fixed selling 50,000 10
Administrative (all fixed) 75,000 15
Allocated corporate expenses 1,00,000 20
Rs. Rs. 593
29,65,00
0
* The sales commission is based on a flat fee of Rs. 48 per desk sold.
Required:
a) If there is no commission expense, should Purna accept this
special order?
b) If the order is accepted, what would be the effect on company
probability?
c) Should the order be accepted if a commission fee must be paid to
the sales representative covering the Middle East?(TU 2045)

P – 11 The waterbed company manufactures several types of waterbeds. Expecting a jump in demand for
its product, the company built a large plant that currently is being utilized at 60 percent of capacity. A
salesman brings in an offer from a large motel chain to purchase 100 heated king-size waterbeds for a price of
Rs. 450 each. Normal selling price for the bed is Rs.800 each. The schedule of the present costs of the king-
size waterbeds for the current year's production was as follows: Acceptance of the order would cause no
increase in any fixed cost.
Particulars Costs for Unit
1,000 units cost
Direct Materials Rs. 260,000 Rs. 260
Direct Labour 80,000 80
Manufacturing overhead (40% variable) 160,000 160
Marketing (1/3 variable) 120,000 120
Administrative (10% variable) 100,000 100
Total Rs. 720,000 Rs. 720

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Required:
a) Should the company accept the offer? Support your answer.
b) Would your answer to a change is sales commission of Rs. 20 a bed
could be eliminated on this special order?
c) Assume that 75 percent of the variable marketing costs can be
eliminated. What would be the effect on the net income from
accepting this order? (TU 2046)

P – 12. The Kathmandu Product Ltd.; a company engaged in

production of specialized goods called ‘Kath Craft’ has been
utilizing its capacity only by 80% of its available capacity. The
company received an special offer to supply 25,000 units of its
product most similar to one the company at present is selling in
the market, but under different brand name. The price offered is
Rs.100 per unit. The data relating to produce one unit of regular
product are presented below:
Direct Material cost 4 units @ Rs. = Rs.
10 40.00
Direct Labour cost 3 hours @ Rs. = Rs.
10 30.00
Manufacturing overhead 3 hours
@ Rs. 15 = Rs.
(based on direct labour hour) 45.00
Total cost per unit Rs.
115.00
The company at present is selling its product at Rs. 150 per unit. The
company has adopted a policy of defining its capacity in direct labour
hour. The annual normal budgeted hour is 300,000 hours and the
budgeted fixed overhead for the period is Rs. 15,00,000. All
manufacturing overheads are applied to production on the basis of
direct labour hour at Rs. 15 per hour. The special offer will have no
other cost than regular production cost.
Required:
a) Should the company accept this offer and also show how total profit
of the company would change by accepting this offer?
b) Would the company have any opportunity cost of the offer? (TU
2050)

P – 13. A company with a normal capacity of 25,000 DLH has been

able to utilize only 80% of its capacity in the past. The company
received an offer to supply 30,000 units of its product but in the
other brand name at a price of Rs. 15 per unit. The regular selling
price and cost of manufacturing one unit of output have been
detailed below:
Selling price per unit Rs. 20
Direct material Rs. 5

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 Direct labour 0.25 hours Rs. 5
Manufacturing overhead cost 0.25 hour Rs. 6
Total manufacturing cost Rs. 16
The selling and distribution cost would be Rs. 2 per unit and budgeted
fixed manufacturing cost for normal capacity volume would be Rs.
300,000.
Required:
a. Differential cost analysis
b. Opportunity cost of offer if any. (TU 2056)

P – 14. The income statement of Nepal Thai Food Ltd. has been
presented below:
Products Lovely Fancy Total
Sales unit 3,000 2,000 5,000
Sales revenue 60,000 20,000 80,000
Less: Variable cost of goods sold 30,000 10,000 40,000
Contribution margin 30,000 10,000 40,000
Less: Fixed cost
Joint cost 10,000 2,000 15,000
Departmental fixed cost 8,000 7,000 10,000
Total fixed cost 18,000 7,000 25,000
Net income 12,000 3,000 15,000
Company received a special offer to supply 2000 units of lovely
product in a different brand name, at Rs.16 per unit. The special
product would need material cost of Rs.5 per unit, direct labour cost of
Rs.4 per unit and the variable manufacturing overhead cost of Rs.2 per
unit. The company has been able to utilize its capacity in the past and
production of special product would be possible only if, the production
and soles of Fancy product could be curtailed by 1000 units. However,
the special product would need investment in special device a sum of
Rs.4,000 and would have to spend Rs.2,000 for setup cost.
Required:
1. Sales volume to company break even.
2. Differential cost analysis to decide whether the company should
accept the order.
3. Opportunity cost of order if any.

A company has normal capacity of 60,000 Direct Machine Hours

(DMH). The production and sales volume per year at present have
been given below:
Regular demand in units 1,00,000
Cost of production per unit: units
Direct material
Direct labor, 1 hour Rs. 30.00
Manufacturing overhead, 0.5 DMH 12.00

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 Selling price per unit: 48.00
Budgeted fixed overhead at present Rs. 100
capacity Rs. 3,600,000
The company received an offer to supply 25,000 units at a price of
Rs. 75 per unit
Required:
a) Statement showing differential analysis to decide whether the
company should or should not accept the offer.
b) The opportunity cost of special offer if the company accepts the
offer.
c) What other qualitative factors might be relevant here?