Answer the following questions after reading the information below.

a$.$ If the department store offered $$80,000$ for the $5,000$ extra products, should PA

accept the order when it is working at $70\%$ capacity, i$.$e$.70,000$ products?

b$.$ How would your answer change if at all, if PA is currently operating at full

capacity with confirmed sales for all products?

c$.$ At full capacity, what if PA outsourced the printing, and reduced direct labour on

the Special Order by $50\%?$ The franchise fee would then be paid by the printer.

The cost of outsourcing is quoted as $$6$ per unit. Is this beneficial to the company?

Note: Show your workings in full.

Transcribed Image Text:

Paulo Alexandrio Ltd [PA] makes numerous lines of men's and women's sleepwear. Senior management has recently been approached by a large department store group to make a special order of children's sleepwear with a movie character theme on the fabric. PA is currently working at 70% of full capacity. The Head of Marketing has estimated the figures for the special order of 5,000 requested by the department store group. He has followed the company policy of full pricing which includes an allocation of selling and administration expenses plus a 15% markup. Other information includes: a. Fixed Manufacturing Overhead is normally applied at 80% of direct labour dollars. The annual fixed overhead budget is $400,000 based on 100,000 products at full capacity. b. A franchise fee would have to be paid to the movie company to use their name and characters. c. Total selling and administration costs are estimated as $100,000 for the current year. These costs are believed to be a function of the total product capacity, therefore, selling and admin costs are applied on products produced. d. At full capacity, PA could choose to outsource the printing, and reduce direct labour on the Special Order by 50%. The franchise fee would then be paid by the external printer. The cost of outsourcing is quoted as $6 per product. Cost Per Product Cost for 5,000 Products Manufacturing costs Cloth Buttons Franchise Fee & Printing $ Direct Labour VMOH SSSS EA 3.00 1.00 $ 5.00 5.00 1.50 FMOH Selling & Admin Total OFFER AAAAAAAAAAA $ 15,000.00 5,000.00 $ 25,000.00 $ 25,000.00 $ 7,500.00 20,000.00 5,000.00 102,500.00 80,000.00 Paulo Alexandrio Ltd [PA] makes numerous lines of men's and women's sleepwear. Senior management has recently been approached by a large department store group to make a special order of children's sleepwear with a movie character theme on the fabric. PA is currently working at 70% of full capacity. The Head of Marketing has estimated the figures for the special order of 5,000 requested by the department store group. He has followed the company policy of full pricing which includes an allocation of selling and administration expenses plus a 15% markup. Other information includes: a. Fixed Manufacturing Overhead is normally applied at 80% of direct labour dollars. The annual fixed overhead budget is $400,000 based on 100,000 products at full capacity. b. A franchise fee would have to be paid to the movie company to use their name and characters. c. Total selling and administration costs are estimated as $100,000 for the current year. These costs are believed to be a function of the total product capacity, therefore, selling and admin costs are applied on products produced. d. At full capacity, PA could choose to outsource the printing, and reduce direct labour on the Special Order by 50%. The franchise fee would then be paid by the external printer. The cost of outsourcing is quoted as $6 per product. Cost Per Product Cost for 5,000 Products Manufacturing costs Cloth Buttons Franchise Fee & Printing $ Direct Labour VMOH SSSS EA 3.00 1.00 $ 5.00 5.00 1.50 FMOH Selling & Admin Total OFFER AAAAAAAAAAA $ 15,000.00 5,000.00 $ 25,000.00 $ 25,000.00 $ 7,500.00 20,000.00 5,000.00 102,500.00 80,000.00

Answer rating: 100% (QA)

a To determine whether PA should accept the order for the extra 5000 products we have to calculate the additional revenue and compare it with the costs of producing these products Additional Revenue T... View the full answer