Evaluating Indian Airport Order: Special Order Pricing Concepts

This assignment provides a detailed analysis of a special order pricing scenario involving an Indian airport project. It evaluates the feasibility of accepting the order by considering incremental costs, profitability, and other relevant factors such as alignment with corporate strategy, availability of resources, and regulatory compliance. The solution examines the impact of changes in labor costs and tax rates on the project's profitability, offering a comprehensive assessment of the financial implications under different scenarios. The analysis uses special order costing techniques, focusing on variable costs and incremental revenues to determine the project's viability. The assignment concludes with recommendations on whether to accept the special order based on the financial and strategic advantages it presents, including potential market expansion and future growth opportunities. Desklib provides this assignment solution and many more to aid students in their studies.

ASSIGNMENT 7
INDIAN AIRPORT ORDER
Answer 1
The profitability of CCC shall increase by $1540500 after considering the decrease in labour cost on
account of reduction in labour hours by $494 per unit. Further, only variable cost has been
considered for the purpose of computation of profitability and thus on the basis of relevant costing,
the proposed project seems feasible. Further, the profit after tax shall increase by 11% approx. on
account of the said project. Thus, the project shall be accepted.
Answer 2
The other factors that may impact the feasibility of the current project include:
(a) The acceptance of above project is in alignment with the corporate objective and strategy;
(b) Safety of Employees and Public;
(c) After sales service and customer relation maintainability;
(d) Availability of raw material, power, and other basic amenities of the project;
(e) Availability of man power and the employees motivation to carry out the project;
(f) Availability of other material and ancillaries to execution of project;
(g) Environmental constraint if any;
(h) Government laws and regulations
(i) Capacity of plant
The Indian order complies with the following:
(a) The acceptance of above project is in alignment with the corporate objective and strategy;
(b) Availability of raw material, power, and other basic amenities of the project;
(c) Availability of man power and the employees motivation to carry out the project;
(d) Availability of other material and ancillaries to execution of project;
(e) Environmental constraint if any;
(f) Government laws and regulations
(g) Capacity of plant
No information has been given regarding the following parameters:
(a) After sales service and customer relation maintainability;
(b) Safety of Employees and Public;
Answer 3
Special Order Costing is a technique under which only those costs which shall be additionally
incurred post acceptance of project/ order is considered for the purpose of computation of cost per
piece. Under the said methodology, fixed costs are not considered as the same would not have
changed if the said project has not been carried out. Thus, only variable incremental cost are
considered under special order costing.
Based on the details provided, CCC shall accept the special order based on the following rationale:
(a) Cost of Production variable is less than the order price;
(b) Profitability of the company increases by 5%;
(c) Order shall open gate for Indian Market;

(d) Future relation and growth of market in India.
Answer 4
If the cost of labour increases by 25% per unit as stated in the question, the following impact may be
seen in the special order costing:
The special order shall still remain profitable for the company. However, the profit of the project
shall reduce to 9% of the existing profitability of the company. The analysis has been presented
here-in-below for analysis:
Computation of Cost per Unit
in $
Sl No Particular Compact
1 Direct Material Cost 3132
2 Direct Labor Cost 2375
3 Manufacturing overhead- Variable 2507
4 Total Manufacturing Cost (1+2+3) 8014
5 Selling Price 9600
6 Profit per Unit 1586
7 No of Units 1500
8 Total Profit (6*7) 2379000
9 Tax 713700
10 Net Income 1665300
11 Existing Profit
1,89,79,000.0
0
12 % of existing Profit 9%
Answer 5
The impact on profitability of the company post imposition of additional tax under both scenario
when overtime labour hour rate is applicable and when the same is not applicable has been
presented here-in-below:
Overtime hour and increase in tax rate
Computation of Cost per Unit
in $
Sl No Particular Compact
1 Direct Material Cost 3132
2 Direct Labor Cost 2375
3 Manufacturing overhead- Variable 2507
4 Total Manufacturing Cost (1+2+3) 8014

Computation of Cost per Unit
5 Selling Price 9600
6 Profit per Unit 1586
7 No of Units 1500
8 Total Profit (6*7) 2379000
9 Tax (35%) 832650
10 Net Income 1546350
11 Existing Profit 1,89,79,000.00
12 % of existing Profit 8%
No Overtime hour but increase in tax rate
Computation of Cost per Unit
in $
Sl No Particular Compact
1 Direct Material Cost 3132
2 Direct Labor Cost 1900
3 Manufacturing overhead- Variable 2507
4 Total Manufacturing Cost (1+2+3) 7539
5 Selling Price 9600
6 Profit per Unit 2061
7 No of Units 1500
8 Total Profit (6*7) 3091500
9 Tax (35%) 1082025
10 Net Income 2009475
11 Existing Profit 1,89,79,000.00
12 % of existing Profit 11%
Under both the scenario, the project shall seem feasible. Hence, the special order shall be accepted.