Reference no: EM132595537

Different machines are set up in a production department of M&P Company. On machine A123, only one product - Matte, is manufactured. The total unit cost of producing and selling one unit of Matte is as follows:

Direct material = RM40

Direct labour (0.5 hours x RM60 per hour) = RM 30

Machine costs (0.3 hours x RM150 per hour) = RM45

Variable selling expenses = RM 5

Total costs = RM120

The direct labours who work on producing Matte consist of one-third specialized personnel for handling machine A123. The remaining labours could also be employed in the rest of the production department, where other products are made. In total, enough work is provided for all of the direct labours. The machine costs of RM150 comprise the following:

Depreciation = RM90

Energy = RM30

Maintenance costs = RM30

Unlike energy, maintenance costs are independent of the production volume.

The normal production and sales of Matte is 10,000 units per year, and the normal production capacity of the machine to produce Matte is 3,000 hours per year. Matte is sold at RM125 per unit.

Required:

Question a. Suppose the current production capacity of machine A123 is 2,700 hours. M&P Company has been approached by Kent Ltd. to supply 1,000 units of Matte for RM100 per unit. If M&P Company accepts the order, an additional cost of RM4 per unit will be incurred for special packaging. However, no variable selling expenses will be incurred as the order was made directly to M&P Company.

i. Should M&P Company accept the special order? Justify your answer.

ii. Without decreasing its total net income, what is the minimum unit sales price for which the company could sell to Ken Ltd.?