4.2 Todcom Ltd manufactures walking rings for toddlers. The monthly production d

Question

4.2 Todcom Ltd manufactures walking rings for toddlers. The monthly production during the past few months was 1 000 walking rings per month which utilised 80% capacity. The company received an order to supply 240 walking rings at R164 each. The manufacturing costs per ring are provided below: Required: 4.2.1 Advise the management of Todcom Ltd whether to accept the special order or not. (10) Product M Product N Sales demand (in units) 500 500 Per unit (R) Per unit (R) Contribution per unit 80 120 R Variable costs 170 Direct materials 40 Direct labour 70 Manufacturing overheads 32 Marketing and administration 28 Fixed costs 24 Manufacturing overheads 14 Marketing and administration 10 Total cost per unit 194

Explanation / Answer

Production which could be achieved At 100% capacity is = 1000/0.8= 1250 rings.

Which means 250 rings capacity idle.

Total cost = 194 per unit.

Of which fixed cost and overheads = 10+14+24+28+32= 108

Variable cost = 86.

If the order is to supply 240 rings @164 each. The variable cost is covered and contribution = 164-86= 78$

So the company should accept the project.

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