Raleigh Ltd’s costs and revenues for the current year are expected to be:

It was expected that 200,000 units would be manufactured and sold, the selling price being £12 each. Suddenly during the year two enquiries were made at the same time which would result in extra production being necessary. They were:

(A) An existing customer said that he would take an extra 10,000 units, but the price would have to be reduced to £10 per unit on this extra 10,000 units. The only extra costs that would be involved would be in respect of variable costs.

(B) A new customer would take 15,000 units annually. This would mean extra variable costs and an extra machine would have to be bought costing £15,000 which would last for 5 years before being scrapped. It would have no scrap value. Extra running costs of this machine would be £6,000 per annum. The units are needed for an underdeveloped country and owing to currency difficulties the highest price that could be paid for the units was £9.25 per unit.

On this information, and assuming that there are no alternatives open to Raleigh Ltd, should the company accept or reject these orders? Draft the memo that you would give to the managing director of Raleigh Ltd.

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Direct labour Direct materials Indirect manufacturing costs: Variable Fixed Administration expenses Selling and distribution expenses Finance expenses £ யு 450,000 50,000 £ 600,000 700,000 500,000 120,000 60,000 20,000 2,000,000