SPECIAL ORDER

QUESTION 2

Cherry Blossom bakes a variety of cup cakes. Data relating to the coming year’s planned operations are
given below:

RM

Sales (2,300,000 pieces) 5,750,000

Cost of sales 3,510,000
Gross profit 2,240,000
Selling and administrative expenses (1,780,000)
Net income 460,000

The factory has capacity to manufacture 2,500,000 pieces of cup cakes per year. Fixed cost included in
the cost of sales are RM750,000. The variable selling and administrative expenses are 10% commission
based on sales value and RM0.50 per piece being paid for decorating the cup cakes.

Datin Seri Wana has approached the sales manager of cherry Blossom offering to buy 400,000 pieces of
cup cakes at price of RM2.00 per piece. These cup cakes will be used for her daughter’s wedding. The
sales manager believes that accepting the offer would result in a loss because the average total cost of
cup cakes is RM2.30. He feels that even though sales commission is excluded, it would still result in a
loss.

Required:

a) Determine whether the company should accept the offer made by Datin Seri Wana.(show all
working)

b) Assuming the same facts as in a) above, what is the minimum price that company should fix and
still earns a profit RM460,000?

c) Explain the management four (4) qualitative factors the company should consider before
accepting the special offer.
QUESTION 3

Tea time Sdn.Bhd, a company located in Muar, makes bottled fruit preserves. It has an annual plant
manufacturing capacity of RM24,000 bottles. Its estimated operating results for the year as follows:

Production and sales of RM20,000 bottles

Total sales 180,000

Manufacturing costs
Fixed 60,000
Variable (per unit) 2.60
Selling and administrative espenses:
Fixed 30,000
Variable (per unit) 1.00

Required:

If Tea Time accepts a special order for RM5,000 bottles at a selling price of RM4 per bottle, what would
be the effect on the total net income for the year? Show the changes to the net income.

QUESTION 4:

Rubberhands Bhd produces and sells surgical gloves. The gloves are sold to local dealers for RM1.50 per
pair. Rubberhands Bhd does not usually sell the gloves directly to foreign dealers. The normal cost per
pair is as follows:

RM
Direct material cost 0.6
Direct labour cost 0.15
Manufacturing overhead (2/3 fixed) 0.45
Administration overhead (all fixed) 0.05
total 1.25
Rubberhands Bhd current production and sales is RM50 million pairs per annum although it has the
capacity to produce 60 million pairs per annum without working overtime. The company is want to
utilize the excess capacity and to improve its profit.

Required:

Evaluate each situation independently:

a. An importer from Brunei has offer RM10 million for an order of 10 million pairs. Rubberhands
Bhd is to pay the freight cost estimated at RM 150,000.

b. A dealer from Surabaya has offered to buy 15 million pairs at RM1.10 per pair. Freight cost
amounting to RM180,000 will be borne by the Surabaya dealer. Evaluate this offer under each of
the following assumption:

i. Rubberhands cannot work overtime to increase its production capacity and has to cut
down on its regular sales order to accept the order.

ii. Rubberhands does not intend to cut down its regular sales and instead will work
overtime to increase its production capacity, which is paid at twice the normal wage
rate.

QUESTION 5

R & R Bhd manufacture of small appliances, makes and sells a small food processor called mini-mill. The
usual selling price for the mini-mill is RM67.50. The cost of the mini-mill is made up of the following
items.

RM
Direct material 14
Direct labour 4
Manufacturing overhead 16
Variable selling expenses- commission 10
Fixed selling expenses 8
Fixed administrative expenses 2
Total 54
Budgeted fixed manufacturing overhead per annum is RM100,000 and is based on normal capacity of
10,000 units per year. However the sales are currently 9,800 units per year.

A restaurant chain has approached R&R Bhd with an offer to purchase 1,000 mini mills to be used in
their restaurant kitchens. They have offered to pay RM32,000 for mini-mills. Standardization is imported
to restaurant chain management. Therefore, they will only purchases the mini-mills if 1,000 units can be
supplied. R & R Bhd will not have to pay commission (including in the variable selling expenses) on
those units.

For output in excess of normal production, additional labour cost of RM1 will be incurred.

Required:

a) Evaluate the offer made by the restaurant chain and advise whether R&R should accept the
offer or not.