Answer a. The cost of manufacturing per canister is shown in the below table:Manufacturing (cost perunit)ParticularsAmountDirect material300000Direct labour180000Variable overhead120000Fixed Overhead540000Total cost1140000Number of canister760000Cost per canister1.5Answer b.It is important for a company to analyse the profitability before taking a final decision thatwhether it should continue manufacturing the canisters or buy them from an outside source.However, proper calculations are required to be done taking into consideration the cost andother relevant factors. The following two tables shows the profit earned from manufacturingand the profits earned by purchasing which will enable comparability and take quick andadequate decision (Berman, Knight and Case, 2013)...Calculationofprofit(manufacturing)ParticularsAmountSales1672000Less: Direct material(300000)Direct labour (180000)Variable overhead(120000)Fixed overhead(540000)Profit532000Calculation of profit(purchase)ParticularsAmountSales1672000
Less: Direct material(300000)Direct labour (180000)Variable overhead(120000)Fixed overhead(432000)Profit640000The company sells per canister at 2.2 in both the cases. However, when the companypurchases the canister from outside a fixed overhead of 28000 of machinery depreciation and80000 of supervisors salary is reduced which has an impact on the total cost per unit.Answer c.A company first recovers the variable cost that it has incurred and then it tries to recover thefixed cost. It is important for us to calculate the contribution, the contribution can becalculated by deducting variable cost from the sakes figure (Bragg, 2014).Variable cost is the amount which is affected by the level of production whereas fixed cost isconstant it has no effect even if there is an increase or decrease in the level of production. Inorder to take this decision we must compare and analyse the contribution of the normal salesand the contribution of the special order.Contribution per unitNormalSpecial orderSelling price per unit2.21.4Less: Direct material (0.39) (0.39)Direct labour (0.24) (0.24)Variable overhead (0.16)0.16)Contribution per unit 1.41 0.61The contribution of the company is proffered when it is higher as it shows the ability of thecompany to recover its fixed cost.Although practically, we know that the profit in the special order will be less as thecontribution to recover the fixed cost is very less (Brigham and Ehrhardt, 2017).. Stillfollowing is the working which would make it more easier to understand that the companyshould reject the special order (Gitman and Zutter, 2012).Calculation showing profit without the acceptance of the special orderParticularsAmount
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