Big Great Sdn Bhd is a well known electronic car racing manufacturer. One of its famous electronic car manufactured is known as Fast Furious Racing (FFR) which is sold to the retail outlets at a price of RM170 per unit.
The cost of producing of (FFR) is shown below
Cost items
Direct materul
Orect Labour
Production Overhead Seling and distribution Overhead
Administration expenses Total
10
113
Variable production overhead cost is calculated of 37.5% of the production overhead The selling and distribution overhead cost includes the salesman's commission which is poid at a rane of 2% of the normal selling price of FFR
The management of the company reported that the company is currently producing its product at 21,000 units which is 70% of the maximum capacity. The management is looking forward utilized the spare capacity in order to expand the operation of the company
Big flang Sdn Bhd and Cyber Great Sdn Bhd approach Big Great Sdn Bhd and propose for request of special order. The management of Big Great Sdn Bhd plans to accept only one prposal. The details of both proposals are as follows
Both companies request the same quantity of special order which is 12,000 units.
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The offer price from Big Bang Sdn Bhd is RM40 per unit lower than the normal price fing Bang Sơn Bhd requires some modifiastion to be made to the product. The
modification cost is RM15 per units Cyber Gireut Sdn Bhd offers to buy FFR at 80% of the normal price
According to the specification provided by Cyber Great Sdn Bhd. it requires other types of materials which results in a 10% increase in the direct maternal cost Big Great Sdn Bhd will need to incur additional transportation post of RM22.500 lor each of the proposals. However, only Big Bang Sơn Bhd is willing to pay for the cost by imell The fixed administration expenses of Big Great Sdn Bhd will increase by RM2,500 tor
each proposal vii Salesman's commission will be paid only for the sales in retail outlets
To analyze the financial impact of accepting each proposal, we need to calculate the costs and revenues associated with each option.
Option 1: Accepting the proposal from Big Bang Sdn Bhd
- Offer price per unit: RM170 - RM40 = RM130
- Modification cost per unit: RM15
- Total additional transportation cost: RM22,500
- Total direct material cost increase: 10% of RM10 (original direct material cost) = RM1
- Total administration expense increase: RM2,500
- Total production cost per unit: Direct material cost + Direct labor cost + Variable production overhead cost
- Total production cost per unit = RM10 + RM113 + (37.5% x Production overhead cost)
Option 2: Accepting the proposal from Cyber Great Sdn Bhd
- Offer price per unit: 80% x RM170 = RM136
- Total additional transportation cost: RM22,500
- Total direct material cost increase: 10% of RM10 (original direct material cost) = RM1
- Total administration expense increase: RM2,500
- Total production cost per unit: Direct material cost + Direct labor cost + Variable production overhead cost
- Total production cost per unit = RM11 + RM113 + (37.5% x Production overhead cost)
To determine the most profitable option, we need to compare the revenues from selling the special order with the costs associated with each option. The calculations will depend on the specific values of the production overhead cost, which are not provided in the given information.