RG Motors has been approached by a new customer with an offer to purchase 5,000  units of its hand-free, Wi-Fi-enabled automotive model – the SMART, at a price of  RM18,000 per automobile. RG’s other sales would not be affected by this new  customer offer. RG normally produces 100,000 units of its SMART model per year but  only plans to produce and sell 90,000 units in the coming year. The normal sales price  is RM35,000 per SMART. Unit cost information for the normal level of activity is as  follows:    Table 7: Production Costs      Total Cost RM Direct materials  10,000 Direct labor 2,000 Variable overhead 4,000 Fixed overhead 8,000 Total  24,000 Fixed overhead will not be affected by whether or not the special order is accepted. Required:   (i) List the relevant costs and benefits of the two alternatives of the special order.  (ii) Propose whether operating income increase or decrease if the order is accepted with  calculation details.

Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter27: Multinational Financial Management
Section: Chapter Questions
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RG Motors has been approached by a new customer with an offer to purchase 5,000  units of its hand-free, Wi-Fi-enabled automotive model – the SMART, at a price of  RM18,000 per automobile. RG’s other sales would not be affected by this new  customer offer. RG normally produces 100,000 units of its SMART model per year but  only plans to produce and sell 90,000 units in the coming year. The normal sales price  is RM35,000 per SMART. Unit cost information for the normal level of activity is as  follows: 

 

Table 7: Production Costs 

 

 

Total Cost

RM

Direct materials 

10,000

Direct labor

2,000

Variable overhead

4,000

Fixed overhead

8,000

Total 

24,000



Fixed overhead will not be affected by whether or not the special order is accepted.

Required:  

(i) List the relevant costs and benefits of the two alternatives of the special order. 

(ii) Propose whether operating income increase or decrease if the order is accepted with  calculation details. 

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