Answer Happy

Bureau Office Supplies Ltd The marketing director was determined to gain a large order for computer desks from a major local authority. There was spare capacity on the production line as a recent contract had just been cancelled. The buyer wanted to purchase 1,000 desks at a price of $70 each. Bureau's marketing director knew this was a price lower than that offered to most of their customers. The order was being discussed at a board meeting and the production manager presented the following cost data: Computo dosks full unit cost statement Direct labour $25 Direct materials $30 Aoportioned overheads $30 each. How can you possibly justily selling these des at a total loss of $15,0007" he asked. Who has the better case? is the marketing director justified in his attempt capture this order? is the production manager right to be concerned at the apparent loss the order will make the appropriate answer depends on the following factors Does the order make a contribution to overheads by the price exceeding direct costs? Is there spare capacity? Can the order be accepted without further Overhead expenditure-eg. a special machine needed just to make goods for this ordert . Are other orders likely Is there another customer who is prepared to paya higher price for these goods? . Will the price of the order become known to other customers Full unit cost $85 The production manager was amazed at the willingness of the marketing department to sell the desks for $70
25 marks, 35 minutes] 1 Use the contribution/marginal-costing approach to calculate whether the new order will add to the profits of the business or not. [10]