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Operating Costs

Solera Company manufactures a standard product SV1 which is a smart vacuum cleaner. SV1

currently fully utilises the available production capacity of 6,000 machine hours per period.

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Solera Company has been approached by a potential customer with a view to the placement

of an order for 3,000 units of the product at a price of $30 per unit. The product would need

to be modified to the customer’s own specification. Modifications will include changes in

power voltage, packaging and design which will result in additional operating costs being



Details of operating costs, both for the standard product and for the modified version, are

as follows:


Standard product Modified product

$/unit $/unit

Direct materials 7.40 9.00

Direct labour 7.50 7.95

Production overheads 6.00 (0.4 machine hrs) 9.00 (0.6 machine hrs)

Other information:

(1) Fixed production overheads are currently $67,500 per period

(2) The selling price of the standard product is $23 per unit

(3) Further to the costs set out above, investment of $4,500 would be required in

specialised equipment in order to be able to manufacture the modified product


a) Advise the Solera Company whether accepting the new order would be worthwhile.

Support your advice with appropriate calculations and explanations based on the

above figures.

b) State three other factors that may influence the decision.

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