Management Accounting: Special Order Analysis and Decision Making

This assignment solution delves into a management accounting problem concerning a special order decision. The analysis begins by calculating the contribution per unit for both normal and special orders, comparing the profitability of each option. The solution then evaluates whether accepting the special order is financially beneficial by comparing the profit generated from selling at normal prices versus accepting the special order. The financial analysis concludes that the company should not accept the special order based on the financial grounds. Furthermore, the solution considers non-financial factors, such as building customer relationships, and long-term implications. The assignment includes references to support the analysis and conclusions, providing a comprehensive understanding of the decision-making process in management accounting.

MANAGEMENT ACCOUNTING

Answer c.
In order for us to draw a conclusion whether to accept the special order or not we need to
compare the contribution for each unit, as it will help us to determine that whether the
recovery of the fixed cost will be possible or not.
Contribution is the amount of money that has been left to recover the fixed cost incurred
because of manufacturing. As fixed overhead does not change with the level of production,
the same amount will be charged i.e. 540000. Therefore, we need to compare the contribution
per unit and the calculations are shown below:
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
A company should not accept the special order if it takes its decision with respect to
recovering the fixed overhead also.
Let us now see, what the profit of the company is if it sells 20000 units of special order at 1.4
as demanded and the remaining 740000 units at 2.2 which is normally done and then compare
it with the profit if it sells the entire production at 2.2.
Calculation of profit if the company sells all its 760000 units at 2.2 without accepting the
order:
Particulars
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
Calculation of profit if the company accepts the order:
Particulars Amoun

t
Sales
165600
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 516000
Therefore, it is clear that the company should not accept the order on the basis of financial
grounds.
Answer d.
In the above answer, I have stated that the company should not accept the offer on the
financial grounds. However, there may be certain non financial grounds that a company
should consider before taking its final decision (Khan & Jain, 2013).
On the financial grounds, the company could have bought the canisters from the Canister
Company and then sell it at 1.4 per unit as demanded; in that case the company could have
expected to generate profits.
On the basis of non financial factor, the company should analyse the impact of rejecting or
accepting the order it may have on future. There may be a scope to increase the selling price
in the future along with the sales volume. Some projects may not be beneficial in the short
run but could be in the long run. This also helps to build good relation with the customer
which also leads to enhancing the goodwill of the company as we know customer satisfaction
is the most important aspect on which the company should pay attention in order to survive
and compete. Sometimes there may not be any profits but the company has to accept the
order to meet up with the industry standards.
Nowadays, along with the financial aspects it is equally important to consider the non
financial aspect also (Pandey, 2010).

REFERENCES:
Khan, M., & Jain, P. (2013). Management accounting. New Delhi, India: McGraw-Hill
Education (India).
Pandey, I. (2010). Management accounting ; planning and control approach. Noida: Vikas
Pub. House Pvt. Ltd.