(a) What is meant by the terms contribution and marginal cost?

(b) Barton & Co Ltd make and sell 2,000 units per month of a product ‘Barco’. The selling price is £65 per unit, and unit costs are: direct labour £8; direct materials £17; variable overheads £11.

Fixed costs per month are £29,400.

The company receives two export orders for completion in September 2002. Order A requests 600 items at a special total price of £20,000; order B requires 750 items at a total price of £34,000.

Order A will require no special treatment, but order B will demand extra processing at a cost of £6 per item. The company has sufficient capacity to undertake eitherA or B in addition to Its current production, but only by paying its direct labour force an overtime premium of 25 per cent.

Calculate the company’s contribution and the profits for the month if:

(i) normal production only takes place

(ii) order A is accepted in addition to normal production

(iii) order B is accepted in addition to normal production.

(c) Use your answer to (b) to demonstrate that a company will normally accept an order which produces a contribution towards overheads.