Pieco Engineering Company has received an once-off export order for its sole product that would require...
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Pieco Engineering Company has received an once-off export order for its sole product that would require the use of half of the factory's total capacity, which is estimated at 4 lakh units per annum. The condition of the export order is that it has to be accepted in full, acceptance of part quantity is not allowed. The factory is currently operating at 60% level to meet the demand of its domestic customers. As against the current price of 6.00 per unit, the export offer is 4.70 per unit, which is less than the total cost of current production. The cost break-down is given below: 21-468 Direct material 2.50 per unit Direct labour 1.00 per unit Variable expense 0.50, per unit Fixed overhead 1.00 per unit sus C 3903 Total cost Langit val A5.00 per unit 5:55 327 V The company has the following options: (a) Accept the export order and cut back domestic sales as necessary (b) Remove the capacity constraint by installing necessary balancing equipment and also by working overtime to meet both domestic and export demand. This will increase fixed overheads by 15,000 annually and additional cost for overtime work will amount to 40,000 for the year. (c) Appoint a sub-contractor to manufacture the additional requirement and meet the domestic and export requirement in full by supplying raw materials, paying a conversion charge 2.00 per unit and appointing a supervisor at a salary of 3,000 per month for checking the quality of the product and controlling operations at manufacturing unit. (d) Refuse the order Required: 02.20 A (i) A statement of costs and profit under each of the above four options. (ii) Your recommendation, with reasons, as to which of these options the company should decide upon. Pieco Engineering Company has received an once-off export order for its sole product that would require the use of half of the factory's total capacity, which is estimated at 4 lakh units per annum. The condition of the export order is that it has to be accepted in full, acceptance of part quantity is not allowed. The factory is currently operating at 60% level to meet the demand of its domestic customers. As against the current price of 6.00 per unit, the export offer is 4.70 per unit, which is less than the total cost of current production. The cost break-down is given below: 21-468 Direct material 2.50 per unit Direct labour 1.00 per unit Variable expense 0.50, per unit Fixed overhead 1.00 per unit sus C 3903 Total cost Langit val A5.00 per unit 5:55 327 V The company has the following options: (a) Accept the export order and cut back domestic sales as necessary (b) Remove the capacity constraint by installing necessary balancing equipment and also by working overtime to meet both domestic and export demand. This will increase fixed overheads by 15,000 annually and additional cost for overtime work will amount to 40,000 for the year. (c) Appoint a sub-contractor to manufacture the additional requirement and meet the domestic and export requirement in full by supplying raw materials, paying a conversion charge 2.00 per unit and appointing a supervisor at a salary of 3,000 per month for checking the quality of the product and controlling operations at manufacturing unit. (d) Refuse the order Required: 02.20 A (i) A statement of costs and profit under each of the above four options. (ii) Your recommendation, with reasons, as to which of these options the company should decide upon.
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Related Book For
Management And Cost Accounting
ISBN: 9781292232669
7th Edition
Authors: Alnoor Bhimani, Srikant M. Datar, Charles T. Horngren, Madhav V. Rajan
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