Relevant Costs and Revenues

QUESTIONS
Q1. The following information applies to questions (1) to (4)

Grant’s Kitchens is approached by Ms Tammy Wang, a new customer, to fulfil a large one-time-only special order for a product similar to one offered to regular customers. The following per unit data apply for sales to regular customers:

Direct materials £455
Direct labour 300
Variable manufacturing support 45
Fixed manufacturing support 100
Total manufacturing costs 900
Markup (60%) 540
Targeted selling price £1440
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Grant’s Kitchens has excess capacity. Ms Wang wants the cabinets in cherry rather than oak, so direct material costs will increase by £30 per unit.

(1) For Grant’s Kitchens, what is the minimum acceptable price of this one-time-only special order?

a. £830
b. £930
c. £785
d. £1440

(2) Other than price, what other items should Grant’s Kitchens consider before accepting this order?

a. Reaction on shareholders
b. Reaction of existing customers to the lower price offered to Ms Wang
c. Demand for cherry cabinets
d. Price is the only consideration

(3) If Ms Wang wanted a long-term commitment for supplying this product, this analysis

a. Would definitely be different
b. May be different
c. Would not be different
d. Does not contain enough information to determine if there would be a difference.

(4) If there was limited capacity, all of the following amounts would change EXCEPT

a. Opportunity costs
b. Differential costs
c. Variable costs
d. The minimum acceptable price.
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