management accounting for Kim Woods

PencilPal Ltd(PP) specializes in making unique plastic pencils and have been doing so for a

decade. The unique feature of unbreakable lead allows PencilPal Ltd to have an edge over its

plastic pencil competitors. PP has dominated 35% of the local market share based on recent market

report. PP has done the market survey and the research has shown that the selling price of the

plastic pencil at 55 cents per unit is widely accepted by their existing customers.

The management received a special order from a customer ordering 3D pencils, which is a unique

3D printing plastic colour pencil of which the customer is willing to pay S$3 per unit. Based on

the estimation, the variable cost for one 3D pencil will be S$2.40. The variable cost is higher

because of the special feature of 3D effects when using the colour pencil. Besides that, the

complicated manufacturing process for 3D printing requires a longer time for production. With

the capability of the existing machine, the production output will be 40 units of 3D pencils per

machine hour. The customer has ordered 100 thousand units. Besides, PP has to incur Twenty

Thousand Singapore Dollars to purchase a 3D printer especially for the special order.

Currently, they are using a special moulding machine for making their products. The machine is

capable of producing 100 plastic pencil per hour. Assume the maximum capacity of the machine

is 10,000 machine hours during the period in which the customer wants the delivery of their special

order. The variable cost of the plastic pencil is 25 cents.

Required:

a) The demand for their existing plastic pencil is 750 thousand units. Assume that the special

order of the 3D colour pencil is accepted by PencilPal Ltd then the company will be

committed to supplying 100 thousand units. . Should the company accept the special

order? In your answer, you should factor in the constraints of the machine hours available.

b) Critically discuss the qualitative factors that the company will need to take into

consideration before accepting the special order of supplying 100 thousand units to the

customer.