A company’s factory has the capacity to produce 13,000 units a year.Its normal production is 10,000 units, the costs of which are: Direct materials$30,000 Direct labour20,000 Production overhead40,000 90,000 Administrative and other overheads10,000 100,000 The normal selling price is $12 per unit. A salesman says that aforeign buyer will take 2,000 units a year if the price can be cut to$8.50 per unit. Additional distribution costs would be $0.50 per unitfor these export items. Of the production overhead costs, 25% arevariable and 75% are fixed. All the administrative and other overheadcosts should be taken as fixed. Required: a) Should the company accept the order? b) What effect would it have on the normal profits of the business?

Name: A company’s factory has the capacity to produce 13,000 units a year.It
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Description: A company’s factory has the capacity to produce 13,000 units a year.Its normal production is 10,000 units, the costs of which are: Direct materials$30,000 Direct labour20,000 Production overhead40,000 90,000 Administrative and other overheads

A company’s factory has the capacity to produce 13,000 units a year. Its normal production is 10,000…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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A company’s factory has the capacity to produce 13,000 units a year.
Its normal production is 10,000 units, the costs of which are:

Direct materials	$30,000
Direct labour	20,000
Production overhead	40,000
	90,000
Administrative and other overheads	10,000
	100,000

The normal selling price is $12 per unit. A salesman says that a
foreign buyer will take 2,000 units a year if the price can be cut to
$8.50 per unit. Additional distribution costs would be $0.50 per unit
for these export items. Of the production overhead costs, 25% are
variable and 75% are fixed. All the administrative and other overhead
costs should be taken as fixed.

Required:
a) Should the company accept the order?
b) What effect would it have on the normal profits of the
business?

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