Management Accounting Homework: Special Order Cost Analysis Solution

This assignment solution focuses on management accounting, specifically addressing the decision-making process related to special orders. It analyzes the impact of special orders on a company's profitability by examining variable and fixed costs, contribution margins, and capacity constraints. The solution includes calculations to determine the contribution per unit for both normal and special orders, highlighting how the ability to recover fixed costs influences overall profitability. Furthermore, it delves into non-financial factors that should be considered, such as competitive advantage, customer loyalty, and future prospects. The solution emphasizes the importance of a company's social obligations and how these factors influence the final decision. The analysis uses references to support the concepts of financial intelligence, corporate cash management, financial management, break-even analysis, and managerial accounting.

MANAGEMENT ACCOUNTING

Answer c.
There are two types of cost that are involved in the process of production. These two cost
may be variable or fixed in nature (Berman, Knight and Case, 2013). The variable cost
increases or decreases with the level of production whereas the fixed cost remains unaffected.
The company first tries to recover the variable cost from the customers and after that tries to
recover fixed cost in the long run.
A company’s ability to recover is fixed cost is truly reflected in the contribution value.
Therefore, contribution is favourable when it is high. We have been asked that whether the
acceptance of special order recover the fixed cost or not. It is only when the cost is recovered
the company can earn profits (Bragg, 2014).
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
It is very obvious that if the contribution is less than the fixed cost recovery will also be less
leading to less or no profitability (Brigham and Ehrhardt, 2017).
The following table shows profit with normal manufacturing:
Particulars
Amoun
t
Sales
167200
0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 532000
Low contribution gives low profitability which is proved hereunder:
Particulars
Amoun
t
Sales 165600

0
Less: Direct material 300000
Direct labour 180000
Variable overhead 120000
Fixed overhead 540000
Profit 516000
The maximum capacity of production is 760000 units as per the question. However, this also
means that if the company accepts special order then the capacity will be divided into two
groups. One of 720000 units and the other of 40000 units. The company has planned to sell
720000 units at its normal selling price of 2.2 per canister and and 40000 units at 1.4 per
canister.
Answer d.
A company can survive in the market only when it performs its duties efficiently. Apart from
earning profits, it also has to fulfil its social obligations. The resources that are used by the
company in order to survive belong to the society. So, if the company does not take part in
fulfilling it social obligations then the license to use these resources may be revoked. This is
also known as the “Iron law of responsibility”. The other factors that should be considered
while taking the decision for special order are:
1. Winning over the competitors- We all know that there exists large number of
competitors in every industry. So, in the growing markets it is always important to
have a lead over the competitors. Many times there may arise a situation when the
company may not be benefitted by accepting the special orders but in order to
compete well it has to win over the confidence of the customers (Garrison, Noreen
and Brewer, 2012).
2. Customer loyalty- The order may have to be accepted by the company even when
there are not sufficient profits in order to win the confidence of the customers and
develop a sense of customer loyalty. Satisfaction of the customer is a very important
aspect as customer is considered as the king of every business. No business can
survive in the market if it is not fulfilling the needs of their customers and satisfying
them to the full extent.
3. Future aspect- A company may see a scope of getting huge orders in the future.
Therefore, sometimes it has to manage with the low profits in order to receive bulk
orders. A company always think of future prospects before taking any decision as it
follows the going concern principle (Ehrhardt and Brigham, 2011).
4. Capacity of production- The Company may reject the order if the maximum capacity
of the company is so low that acceptance of such order may lead to no profits or even
losses. In this case, the company should reject the order as it not even able to recover
the cost wholly.

A company does not only survive to earn profits, it also has to perform its social duties
towards the society as the economic development i.e. the standard of living should improve.
Society and business are interrelated to each other because society needs goods to fulfil its
needs whereas the business wants resources to fulfil these needs which are provided by the
society (Cafferky, 2014).
Therefore, these were some of the non financial factors that should be taken into
consideration before taking the final decision of acceptance or repentance of special order.
REFERENCES:
Berman, K., Knight, J. and Case, J. (2013). Financial intelligence. 1st ed. Boston, Mass.:
Harvard Business Review Press.
Bragg, S. (2014). Corporate cash management. 1st ed. Centennial: Accounting Tools.
Brigham, E. and Ehrhardt, M. (2017). Financial management. 1st ed. Boston, MA, USA:
Cengage Learning.
Cafferky, M. (2014). Breakeven analysis. 1st ed. New York: Business Expert Press
Ehrhardt, M. and Brigham, E. (2011). Financial management. 1st ed. Mason: South-Western
Cengage Learning.
Garrison, R., Noreen, E. and Brewer, P. (2012). Managerial accounting. 1st ed. New York,
N.Y.: McGraw-Hill/Irwin.