Production Decisions and Special Orders

The assignment presents a scenario where a company faces a decision regarding accepting a special order versus increasing its existing production to its optimum capacity. It requires students to calculate the profitability of both options by considering variable and fixed costs, contribution margins, and ultimately recommend the most profitable decision for the company.

Running head: MANAGEMENT ACCOUNTING
Management accounting
Name of the student
Name of the university
Author note

1MANAGEMENT ACCOUNTING
Table of Contents
Answer to Question (a)..............................................................................................................2
Answer to Question (b)..............................................................................................................3

2MANAGEMENT ACCOUNTING
Answer to Question (a)
Existing production of 7500 units
Particulars Amount Amount Cost per unit
Sales $ 11,25,000.00 $ 150.00
Less: Variable cost
Direct material $ 2,62,500.00 $ 35.00
Direct labour $ 3,00,000.00 $ 40.00
Batch cost $ 75,000.00 $ 10.00
Total variable cost $ 6,37,500.00 $ 85.00
Contribution $ 4,87,500.00 $ 65.00
Less: Fixed cost
Fixed manufacturing cost $ 2,75,000.00
Fixed marketing cost $ 1,75,000.00
Total fixed cost $ 4,50,000.00
Profit $ 37,500.00 $ 5.00
Special order production of 2500 units
Particulars Amount Amount Cost per unit
Sales $ 2,50,000.00 $ 100.00
Less: Variable cost
Direct material $ 87,500.00 $ 35.00
Direct labour $ 1,00,000.00 $ 40.00
Batch cost $ 12,500.00
Total variable cost $ 2,00,000.00
Contribution $ 50,000.00
Less: Fixed cost
Fixed manufacturing cost $ -
Fixed marketing cost $ -
Total fixed cost $ -
Profit $ 50,000.00 $ 20.00
If Aria Ltd accepts the special order, it will increase its profit to ($ 37,500 + $ 50,000)
= $ 87,500 from $ 37,500 as for the new order the company will have to incur the variable
cost only as the fixed cost does not change with the changes in production units and for the

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new order, there will be reduction in the variable batch cost. Therefore, Arial Ltd shall accept
the offer of special order.
Answer to Question (b)
If the capacity of the plant is only for 9000 medals each month and the special order
of 2500 medals is either to be rejected or to be accepted in full then if the special order is
accepted, the company will have to sacrifice the existing units and will have to produce 6500
units from the existing units along with 2500 special order. Therefore, if the special order is
accepted then the profit will be as follows –
Existing production of 6500 units
Particulars Amount Amount Cost per unit
Sales $ 9,75,000.00 $ 150.00
Less: Variable cost
Direct material $ 2,27,500.00 $ 35.00
Direct labour $ 2,60,000.00 $ 40.00
Batch cost $ 65,000.00 $ 10.00
Total variable cost $ 5,52,500.00 $ 85.00
Contribution $ 4,22,500.00 $ 65.00
Less: Fixed cost
Fixed manufacturing cost $ 2,75,000.00
Fixed marketing cost $ 1,75,000.00
Total fixed cost $ 4,50,000.00
Profit $ -27,500.00 $ -3.67
Special order production of 2500 units
Particulars Amount Amount Cost per unit
Sales $ 2,50,000.00 $ 100.00
Less: Variable cost
Direct material $ 87,500.00 $ 35.00
Direct labour $ 1,00,000.00 $ 40.00
Batch cost $ 12,500.00
Total variable cost $ 2,00,000.00
Contribution $ 50,000.00
Less: Fixed cost
Fixed manufacturing cost $ -

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Fixed marketing cost $ -
Total fixed cost $ -
Profit $ 50,000.00 $ 20.00
Therefore, the total profit will be ($ - 27,500 + $ 50,000) = $ 22,500.
However, instead of accepting the special order, if the company increases its existing
production is increased to its optimum capacity and produce 10,000 units then the profit will
be as follows –
Existing production of 10000 units
Particulars Amount Amount Cost per unit
Sales $ 15,00,000.00 $ 150.00
Less: Variable cost
Direct material $ 3,50,000.00 $ 35.00
Direct labour $ 4,00,000.00 $ 40.00
Batch cost $ 1,00,000.00 $ 10.00
Total variable cost $ 8,50,000.00 $ 85.00
Contribution $ 6,50,000.00 $ 65.00
Less: Fixed cost
Fixed manufacturing
cost $ 2,75,000.00
Fixed marketing cost $ 1,75,000.00
Total fixed cost $ 4,50,000.00
Profit $ 2,00,000.00 $ 20.00
It can be seen from the above calculation that if the existing production is increased to
its optimum capacity and produce 10,000 units then the profit will be $ 200,000 which is
more than the profit from accepting the special order by ( $ 200,000 - $ 22,500) = $ 177,500.
Therefore, the company can opt for this option.