Should the Company Accept the Special Order?

The company is considering two alternatives to maximize its profit. The first alternative is to continue manufacturing canisters and selling them as before. The second alternative is to buy the canisters from outside and focus on manufacturing cups instead. The calculations show that buying the canisters and focusing on cups would lead to a higher total profit of $700,000 compared to the current approach. However, other factors such as quality control, timely delivery, and after-sales service should also be considered when making this decision.

MANAGEMENT ACCOUNTING

Answer a.
The following table shows the calculation of cost per canister:
Manufacturing
Particulars
Amoun
t
Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed Overhead 540000
Total cost
114000
0
Number of canister 760000
Cost per canister 1.5
Answer b.
The company has to take make or buy decision which cannot be taken without taking into
consideration various financial and non financial aspect. So, we need to check the financial
grounds by doing some calculations (Berman, Knight and Case, 2013).
Calculation of profit
Particulars Manufacturing Purchase
Sales 1672000 1672000
Less: Direct material 300000 300000
Direct labour 180000 180000
Variable overhead 120000 120000
Fixed overhead 540000 432000
Profit 532000 640000
If the company takes the decision to buy canisters from outside then the company is able to
earn higher profits as there is a cost reduction when we buy the canisters from outside. The
cost that is reduced includes supervisor’s salary of 80000 and machine depreciation of 28000.
Therefore, on the financial grounds the company should stop manufacturing and start buying
the canisters (Bragg, 2014).
Calculation of fixed overhead
Fixed overhead 540000
Less: Supervisors salary 80000
Machinery depreciation 28000
Fixed overhead in purchase 432000

Answer c.
The acceptance or repentance of a special order can be taken by determining the contribution
in both the cases. Contribution is calculated by deducting variable cost from the sales. It can
also be said that contribution is the amount that helps the company to recover its fixed
overheads (Brigham and Ehrhardt, 2017).
Contribution per unit Normal Special order
Selling price per unit 2.2 1.4
Less: Direct material
0.3
9 0.39
Direct labour
0.2
4 0.24
Variable overhead
0.1
6 0.16
Contribution per unit
1.4
1 0.61
As the company has a lower contribution if it accepts the order it should rather reject this
special order because higher the contribution, the more it will have the ability to recover fixed
cost and that would result in higher profits. The impact on the profits of the company is
shown below (Gitman and Zutter, 2012).
(i) Table showing profit when the special order was rejected
Particulars
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
(ii) Table showing profit on acceptance of special order
Particulars
Amoun
t
Sales
165600
0
Less: Direct material 300000

Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 516000
Answer d.
The company has many other duties apart from earning profits. In the above solution, we
were only considered about the financial grounds but the company must not neglect the non
financial aspects while taking decisions. The company should not think of short term profits
but also think of long-term impacts (Hoyle, Schaefer and Doupnik, 2015). There may not be
profit at present but in order to compete with the growing market and to win in the race of
winning the confidence of customers; the company may have to accept the order. It is
important for a company to understand that customer satisfaction is the key to survival
(Ehrhardt and Brigham, 2011).
Answer e.
The company always thinks of maximising its profit by using various alternatives that are
available (Garrison, Noreen and Brewer, 2012). Usually the company manufactures and sells
760000 canisters every year and earns 532000(the calculation for which is shown below).
Particulars
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
This year the company thinks of selling 400000 cups which would help the company earn
60000. It is very clear that the company should continue manufacturing the canisters
(Cafferky, 2014).
Profit on sale of coffee cups (per unit)
Sales: 1.2
Less: Direct material 0.6
Direct labour 0.2
Variable overhead 0.1
Fixed overhead 0.15
Profit on sale of coffee cups (per
unit) 0.15

Profit on 400000 cups
6000
0
However, there is a better alternative that is present with the company. The company should
buy the canisters from outside as it is reducing the fixed overhead to an extent and also
continue with manufacturing cups. This would be the best alternative and can be proved by
the following calculations (Kinney and Raiborn, 2011).:
Calculation of profit
(purchase canisters)
Particulars
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 432000
Profit 640000
Profit on sale of coffee cups (per unit)
Sales: 1.2
Less: Direct material 0.6
Direct labour 0.2
Variable overhead 0.1
Fixed overhead 0.15
Profit on sale of coffee cups (per unit) 0.15
Profit on 400000 cups
6000
0
The total profit for the year will be 64000+60000=700000 every year if this alternative is
adopted (Mondy, 2015).
Answer f.
The other factors that should be considered while taking a decision for the special order are:

1. Check if the quality of the product matches the standards of your manufacturing or
not. The poor quality may dissatisfy the customers which may have a long term effect.
2. It is important to deliver the product to the customers, if timeliness is not kept in mind
it may lose the trust of customers.
3. Any kind of failure whether related to delivery, quality or after sale service may lead
to loss of goodwill in the market which would give competitors an opportunity to
overtake (Schipper, 2012).

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