Aquarelle Textile Ltd manufactures quality beach towels at its highly automated, St Pierre, plant. The plant has a production capacity of 48,000 towels each month. Current monthly production is 30,000 towels. Retail department stores account for all existing sales. Expected results for the coming month (August) are as follows: 

                                                                           Total                     Per Unit

Units sold                                                          30,000

Revenues                                                       Rs 600,000                 Rs 20.00

Cost of goods sold (manufacturing sold)

   Variable manufacturing costs                    225,000                      7.50*

   Fixed manufacturing costs                         135,000                      4.50**

Total cost of goods sold                                360,000                      12.00

Marketing costs

   Variable marketing costs                           150,000                      5.00

   Fixed marketing costs                                 60,000                    2.00

Total marketing costs                                    210,000                      7.00

Full costs of the product                              570,000                      19.00

Operating Income                                     Rs 30,000                  Rs 1.00

*Variable manufacturing cost per unit = Direct material cost per unit + Variable direct manufacturing cost per unit + Variable manufacturing overhead cost per unit

= Rs6.00 + Rs 0.50 + Rs 1.00 = Rs 7.50

**Fixed manufacturing cost per unit = Fixed direct manufacturing labour cost per unit + Fixed manufacturing overhead cost per unit

= Rs 1.50 + Rs 3.00 = Rs 4.50

These amounts are predictions based on past costs. We assume all costs can be classified as either fixed or variable with respect to a single cost driver (units per output).

As a result of a strike at its existing towel supplier, Beachcomber, a luxury hotel chain, has offered to buy 5,000 towels from Aquarelle Textile Ltd in August at Rs 11 per towel. 

No subsequent sales to Beachcomber are anticipated. Fixed manufacturing costs are based on the 48,000-towel production capacity. That is, fixed manufacturing costs relate to the production capacity available and not the actual capacity used.

If Aquarelle Textile Ltd accepts the special order, it will use existing idle capacity to produce the 5,000 towels, and fixed manufacturing costs will not change. No marketing costs will be necessary for the 5,000-unit one-time-only special order. Accepting this special order is not expected to affect the selling price or the quantity of towels sold to regular customers. 

Required: 

(a)  Calculate the total contribution and total profit/loss without the special order and with the special order.

(b)  Based on the calculation in part (a), should Aquarelle Textile Ltd accept Beachcomber `s offer?

What other non-financial factors should Aquarelle Textile Ltd consider before accepting the offer?

Answer rating: 100% (QA)

a To calculate the total contribution and total profitloss we need to consider the costs and revenues associated with and without the special order Wi... View the full answer