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Delima Berhad has received a special order for 2,000 units of its product at a...

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Accounting

Delima Berhad has received a special order for 2,000 units of its product at a special price of RM75. The product normally sells for RM100 and has the following manufacturing costs:

Per unit

Direct materials

RM30

Direct labour

RM20

Variable manufacturing overhead

RM15

Fixed manufacturing overhead

RM25

Total unit cost

RM90

Assume that Delima Berhad has sufficient capacity to fill the order without harming its normal production and sales.

Required:

i) If Delima Berhad accepts the order, what effect will the order have on the company's short-term profit?

ii) What minimum price should Delima Berhad charge to achieve a RM25,000 incremental profit?

iii) Now assume Delima Berhad is currently operating at full capacity and cannot fill the order without harming its normal production and sales. If Delima Berhad accepts the order, what effect will the order have on the company's short-term profit?

iv) Accountants do not ordinarily record opportunity costs in the formal accounting records. Why?

v) Variable costs are always relevant, and fixed costs are always irrelevant. Do you agree? Why?

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