Understand when a company has a capacity left that means in their default product line they already allocated the fixed costs in that case if we get a new order without incurring any additional cost relevant to that order we will accept the order as long as the offer price is similar to the variable costs we are incurring to prepare that order which is 19.5 in this sum . But at the opposite side when no capacity of further production is left in order to accept the order we need to :- (any one)
1.Produce default product line in less quantity to make fit for the special order in our capacity
2. if possible we need to incurred further temporary costs to increase the capacity temporarily (which is not an option in this sum)
So in scenario 1 when we are making space in our capacity to produce the special order that means the special order products will now also bear the load of fixed cost allocation so in this case the minimum price we can quote is atleast 36.5 . Now there are lots of other things which can be considered which aren't given in the sum :-
1.The profitability of the default product line
2.Any specific fixed cost which is seperately attached to the default product line or in the special order products line
3.Any other variable costs which we need to incur in order to deliver the special order
4.Also the quantity of the default production and special order plays a major role in making these short term decisions
I hope you understand the topic and hopefully I am not wrong in any of the concepts I have mentioned if you still feel confused feel free to reply or you can reach me at avimitraghosh84@...
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Avimitra Ghosh
Supervisor
Howrah/Belgachia
India
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