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.
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
Standard product Modified product
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)
(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
b) State three other factors that may influence the decision.
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