A company currently makes and sells 1 000 units per month of its product.

The selling price is £55 per unit, and unit costs are: direct labour £3; direct materials £7; variable overheads £4. Fixed costs per month are £16 200.

The firm receives two special export orders for completion in the same month. Order A requests 500 units at a special price of £6 500; order B requires 600 units at £12 000. Order A will require no special treatment, but order B will demand extra processing at a cost of £5 per unit. The firm has sufficient productive capacity to undertake either A or B in addition to its current production.

(a) Show the firm’s profits for the month if

(i) normal production only takes place Gi) order A is accepted

(iii) order B is accepted. (12 marks)

(b) Explain why a company will generally accept an order which makes a positive contribution towards overheads. (8 marks)

(c) Before accepting an order based upon marginal cost prices, what safeguards must a firm adopt?