(iii) General manufacturing costs: It is JB Limited’s policy to charge a share of the general costs (rent, heating and so on) to each contract undertaken at the rate of £20 for each machine hour used on the contract. If the contract is undertaken, the general costs are expected to increase as a result of undertaking the contract by £3,200.

Spare machine capacity is available and each component would require 4 machine hours. A price of £200 per component has been offered by the potential customer.

Required:

(a) Should the contract be accepted? Support your conclusion with appropriate figures to present to management.