Premier Sdn Bhd manufactures electric toy cars. Several weeks ago, the firm received an inquiry from Mars Sdn Bhd. Mars Sdn Bhd wants to market an electric toy for Premier. Mars Sdn Bhd has offered to purchase 22,000 units if the order can be completed in three months.

The cost data for Premier’s toys are:

	RM
Direct materials	32.80
Direct labour (0.25 hours @RM40)	10.00
Total manufacturing overhead (0.5 machine hours @ RM80 per hour)	40.00
Total	82.80

The following additional information is available:

1. The normal selling price of electric toys is RM106. However, Mars has offered Premier only RM63 because of the large quantity it is willing to purchase.
2. Mars requires a modification of the design that will allow a RM8.40 reduction in direct material cost.
3. Premier Sdn Bhd will have to incur an additional set up cost of RM14,800 and will have to purchase special device RM9,600 to manufacture the electric toys specified by Mars.
4. The total manufacturing rate per hour is RM80 per machine hour. Fixed manufacturing overhead is absorbed based on annual budgeted fixed manufacturing overhead of RM3,000,000 and the budgeted machine hours of 60,000.
5. Premier allocated RM7,200 of its existing fixed administrative expenses for this special order as part of the cost of doing business.
6. To meet the special orders, Premier Sdn Bhd allows the labours to work overtime. Total overtime of 240 hours will be paid at a premium of 60%.
7. At present the company is operating at 70% capacity and the maximum capacity is 10,000 machine hours per month.

Required:

1. Based on the current production capacity, should Premier Sdn Bhd accept the order and meet Mars Sdn Bhd dead line. Show workings in term of hours.
2. Give three (3) alternatives that Premier might consider if the company really interested in doing business with Mars and plans to bulid good business relationship.
3. From the financial perspective, should Premier Sdn Bhd accept the special order? Support your answer with relevant calculations.
4. The director of Premier mentioned that “Accounting system should provide relevant information only and ignore the irrelevant information. Then it will make easier for me to make a decision”. Comment on his remarks.

Answer rating: 100% (QA)

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