Taxation Law and Management of the Order - Assignment Example

PART B The first cost that the company will incur if the order is accepted is the direct material purchases for the additional trolleys that are produced over the current capacity for a month. The company will have to produce 6000 more child trolleys (10,000-4000). 14 metres of rod steel is required to make one trolley and so the total steel that is required to make all the additional trolleys is (14Mx6, 000) 84,000metres. The cost of steel rod per metre is $1.45. The total cost for the steel rod required is ($1.45x84, 000) $121,000.Only one plastic seat is required for each trolley manufactured. The total number of seats required is (6,000x 1) 6,000. One plastic seat costs $7.5. The total cost for the plastic seats will be (6,000x$7.5) $45,000. Four wheels are required for every trolley. The total number of wheels required is(6,000x4) 24,000. The total number of boxes required will be (24000/12) 2000. The total cost for the wheels is (2000x$180) $360,000 The total direct material purchases is ($121,000+$45,000+$360,000) $526,000. This cost is very high putting into consideration the expected sales from the order (10,000 x $90) and the company will not make a significant profit if the order is taken. The company should therefore reject this order and continue with the budgeted production. If the company purchases the machine to make breaks for the child trolleys, only the initial cost of making the purchase will be big. The company already have enough space for an additional machine and therefore there will be no extra cost for space. The machine cost $30,000. With the machine, adding the breaks to the trolleys will be cheap because with the breaks produced in the company there are no much expenses. On the other hand, if the company if the company opts to buy breaks from a supplier each set will cost $6 and so the total cost for adding breaks to all the ordered trolleys will be ($6 x 10,000) $60,000. This is relatively expensive as compared to purchasing the machine for making the breaks. It is therefore better for the company to purchase the machine if the company takes the order. In addition to this, the company will not incur any costs for space of the machine. Since the customer will pay $90 for every trolley the total sales will be ($90 x 10,000) $900,000. This amount of revenue generated is not big enough to cater for all the costs. The company should reject the order. The labour cost for production of the trolleys will increase when the company takes this order. Labour costs include wages, superannuation contributions and workers compensation insurance. It takes 20 minutes to make one child trolley and therefore the total time that it will take to produce the trolleys to fill the order will be (20 minutes x 10,000) 200,000 minutes, which is 3,333.3 hours. The labour cost of production will therefore be (3,333.333 x $14.5) + (4% x 3,333.3 x $14.5) =$50,266.2. This cost is quite small and affordable as compared to the revenue that the company will generate after taking the order and making the sale. However, the accumulating cost will be too high and the profit margin will drop. The company should therefore not take the order because no much revenue will be generated from it. Apart from these costs, the company will meet other financial obligations when it takes the order. There will be manufacturing overhead costs for the trolleys. This includes fixed overhead cost and variable overhead cost. These costs will accumulate to the other existing costs and the profit margin goes down. It is better for the company to opt not to take the order end concentrate on the existing manufacturing budget. The revenues that the order will generate are too small. The company will incur transport costs for the finished goods once the order is accepted and manufacturing done. Since the customer is an overseas company, there must be a demand for the company to meet part of the transport cost. This cost reduces the revenue expected to be generated by a certain proportion. The order will therefore end up not being profitable enough. The company should reject the order because of this reduction in expected profit. The company is currently able to produce 4000 child trolleys but has constrains on direct manufacturing hours. If the company accepts the order, it will be forced to produce 6,000 more child trolleys (10,000-4000). In this case, time is the major non-financial issue of concern. The order is to be delivered to the customer on 1st January 2013. This leaves the company with only 6 months to work on the order. With the current situation in the company, this will be very hard to do. In order to meet this time deadline the company must start producing the trolleys early enough. Manufacturing of the trolleys should start at July 2012 and continue without stopping until all the trolleys that are ordered are manufactured. This will greatly affect the existing direct labour manufacturing budget and as a result, the company may fail to manufacture all the ordered trolleys. It is wise for the company not to take the order and concentrate on the budgeted manufacturing hours. Management of the order is a non-financial issue of concern. If the order is accepted, the company will automatically have to increase the number of employees to increase direct manufacturing labour hours and reduce the existing constrain on direct manufacturing labour hours. This is an additional management issue because the company will have to work on handling the additional employees required. Additional employees will also affect other financial factors. It is wise for the company not to take the order. All these factors make it very clear that it is not advisable to take the order. Although the sales that the company will make from this order are big, all the costs that will be incurred in manufacturing of the trolleys reduce the profit margin. The company should therefore not take the order. Read More