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Viti Ltd, located in southern Viti Levu, manufactures a variety of industrialvalves and pipe fittings that are sold to customers in the eastern states.Currently, the company is operating at about 70 per cent of capacity and isearning satisfactory return on investment. Management has been approached byVanua Industries Ltd of Solomon Islands with an offer to buy 120,000units ofpressure valve. Vanua Industries Ltd manufactures a valve that is almostidentical to the pressure valve produced by Viti
however, a fire in VanuaIndustries’ valve plant has shut down its manufacturing operations. Vanuaneeds the 120,000 valves over the next four months to meet commitments to itsregular customers. Vanua is prepared to pay $19 each for the valves. The cost ofthe pressure valve produced by Viti, which is based on current attainablestandards, is $20, calculated as follows:Direct material $5.00Direct labour 6.00Manufacturing overhead 9.00$20.00Manufacturing overhead is applied to production at the rate of $18 per standarddirect labour. This overhead rate is made up of the following components:Variable manufacturing overhead $6.00Fixed manufacturing overhead (traceable) 8.00Fixed manufacturing overhead (allocated) 4.00Applied manufacturing overhead rate $18.00Additional costs incurred in connection with sales of the pressure valve includesales commission of 5 per cent of sales, and freight expense of $1 per unit.However, the company does not pay sales commissions on special orders thatcome directly to management. In determining selling prices, Viti adds a 40 percent mark-up to total product cost. This provides a $28 suggested selling pricefor the pressure valve. The marketing department, however, has set the currentselling price at $27 in order to maintain market share. Production managementbelieves it can handle the Vanua Industries order without disrupting itsscheduled production. The order would, however, require additional fixed3factory overhead of $12,000 per month in the form of supervision and clericalcosts. If management accepts the order, 30,000 pressure valves will bemanufactured and shipped to Vanua industries each month for the next fourmonths. Vanua’s management has agreed to pay the shipping charge for thevalve.Required:1. Determine how many direct labour hours would be required each monthto fill the Vanua industries order. (5 marks)2. Prepare an analysis showing the impact of accepting the Vanua Industriesorder (15 marks)3. Calculate the minimum unit price that management of Viti could acceptfor the Vanua Industries order without reducing net profit. (5 marks)4. Identify the factors, other than price, that Viti Ltd should consider beforeaccepting the Vanua Industries order. Attachments: AF102-assignm....pdf


Solution ID:565792 | This paper was updated on 26-Nov-2015

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