Seans Company produces sound systems for cars and sells them to automotive manufacturers for R1000 each. Full capacity is 20 000 systems per month, but it is currently producing 18 000 systems per month for its regular customers. The company reports the following monthly results:                  

	Per unit	Total
	R	R
Revenue	100	1 800 000
Manufacturing costs:    Direct materials    Direct labour    Variable overhead    Fixed overhead Selling expenses:    Variable    Fixed	25 10 22 3 19 2	450 000 180 000 396 000 54 000 342 000 36 000
Total costs	81	1 458 000
Operating income	19	342 000

                                                                                               

Seans’ manager, Gayton Brookes, receives a call regarding a one-time special order. Toyota Automotive needs 2 000 systems and will pay R65 per system. Seans will incur no selling costs for the special order.

Required:

1.1       Should Brookes accept this one-time special order? How much would the operating income be if Seans did accept Toyota’s order?

1.2       Toyota’s manager calls again: They’ve run some new calculations, and they really need 2 500 systems at the same R65 price. It will have to be an all-or-nothing deal. Brookes thinks, “Now they’re pushing it… Toyota’s order will displace some of the volume we sell to our regular customers who are a lot more profitable for us”. Assuming that Seans’ regular customer relationships will not suffer due to a small one-time volume reduction, and based on financial considerations alone, what should Brookes do? Provide specific calculations and explain your reasoning.

 1.3       Assuming that Seans’ regular customer relationships will not suffer due to a small one-time volume reduction, up to what volume is Seans better off supplying to Toyota at a selling price of R65?

Answer rating: 100% (QA)

Current Net Income For producing 18000 Units Units PriceUnit Amount Sales 18000 10000 180000000 Dire... View the full answer