Gandhi Ltd renders a promotional service to small retailing businesses. There are three levels of service: the ‘basic’, the ‘standard’ and the ‘comprehensive’. On the basis of past experience, the business plans next year to work at absolute full capacity as follows:

Number of units Selling Variable cost of the service price per unit

£ £

Basic 11,000 50 25 Standard 6,000 80 65 Comprehensive 16,000 120 90 9.8 EXERCISES The business’s fixed costs total £660,000 a year. Each service takes about the same length of time, irrespective of the level.

One of the accounts staff has just produced a report that seems to show that the standard service is unprofitable. The relevant extract from the report is as follows:

Standard service cost analysis

£

Selling price per unit 80 Variable cost per unit (65)

Fixed cost per unit (20) [£660,000/(11,000 + 6,000 + 16,000)]

Net loss (5)

The producer of the report suggests that the business should not offer the standard service next year.

Required:

(a) Should the standard service be offered next year, assuming that the quantity of the other services could not be expanded to use the spare capacity?