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Question: routine ltd manufactures sofas to be sold to different furniture...

Question details

Routine Ltd manufactures sofas to be sold to different furniture retailers. Its manufacturing plant has the capacity to produce 12 000 sofas each month. Current production and sales are 9500 sofas per month. The company normally charges $120 per sofa. Cost information for the current activity level is as follows:

 

      Variable costs that vary with number of units produced

      Direct materials                                                                                             $262 500

      Direct manufacturing labour                                                                          300 000

      Variable costs (for set-ups, materials handling, quality control and so on)

                     that vary with number of batches, 250 batches * $300 per batch                 75 000

      Fixed manufacturing costs                                                                             275 000

      Fixed marketing costs                                                                                       175 000

      Total costs                                                                                                    $1 087 500

 

Routine Ltd has just received a special one-time-only order for 2500 sofas at $70 per sofa. Accepting the special order would not affect the company’s regular business. Routine Ltd makes sofas for its existing customers in batch sizes of 38 sofas (250 batches * 38 sofas per batch = 9500 sofas). The special order requires Routine Ltd to make the sofas in 25 batches of 100 each.

 

Required:

Should Routine Ltd accept this special order? Show your calculations.

 

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