Question: Lahore Cornpany has received a special order for photo equipment it does not normally produce. The company has excess capacity, and the order could be manufactured without reducmg production of the firm's its regular products Discuss the relevance of each of the following items in computing the cost of special order
1. Equipment to be used in producing the order has a book value of Rs 2,000. The equipment has no other use for Lahore Company. If the order is not accepted, the equipment will be sold for Rs 1,500. If the equipment is used in producing the order It can be sold in three months for Rs 800.
2. If the special order is accepted, the operation will require some of the storage space In the company's plant. If the space is used for this purpose, the company will rent storage space temporarily in a nearby warehouse at a cost of Rs 18,000. The Building depreciation allocated to the storage space to be used in producing the special order is Rs 12,000.
3. In the special order is accepted it will require a sub assembly. Lahore company can purchase the sub assembly for rupees 24 per unit from and outside supplier or make it for rupees 30 per unit the cost per unit was determined as follows
Direct Material Cost rs 10
Direct Labour Cost rs 6
Variable Overhead rs 6
Allocated Fixed Overhead rs 8
Total Unit cost rs 30