Brown Ltd is a company that has in stock some materials of type XY that cost £75,000 but that are now obsolete and have a scrap value of only £21,000. Other than selling the material for scrap, there are only two alternative uses for them.

Alternative 1: Converting the obsolete materials into a specialized product, which would require the following additional work and materials:

The conversion would produce 900 units of saleable product, and these could be sold for £400 per unit.
Material A is already in stock and is widely used within the firm. Although present stocks together with orders already planned will be sufficient to facilitate normal activity, any extra material used by adopting this alternative will necessitate such materials being replaced immediately.
Material B is also in stock, but it is unlikely that any additional supplies can be obtained for some considerable time because of an industrial dispute. At the present time material B is normally used in the production of product Z, which sells at £390 per unit and incurs total variable cost (excluding material B) of £210 per unit. Each unit of product Z uses four units of material B.
The details of materials A and B are as follows:

Twelve hundred units of the sub-assembly are regularly used per quarter, at a cost of £900 per unit. The adaptation of material XY would reduce the quantity of the sub-assembly purchased from outside the firm to 900 units for the next quarter only. However, since the volume purchased would be reduced, some discount would be lost, and the price of those purchased from outside would increase to £950 per unit for that quarter.
Material C is not available externally, but is manufactured by Brown Ltd. The 1,000 units required would be available from stocks, but would be produced as extra production.
The standard cost per unit of material C would be as follows:

The unskilled labour is employed on a casual basis and sufficient labour can be acquired to exactly meet the production requirements. Semi-skilled labour is part of the permanent labour force, but the company has temporary excess supply of this type of labour at the present time. Skilled labour is in short supply and cannot be increased significantly in the short term; this labour is presently engaged in meeting the demand for product L, which requires 4 hours of highly skilled labour. The contribution (sales less direct labour and material costs and variable overheads) from the sale of one unit of product L is £24.
Given this information, you are required to present cost information advising whether the stocks of material XY should be sold, converted into a specialized product (alternative 1)
or adapted for use as a substitute for a sub-assembly (alternative 2).

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Material A Material B Direct labour: 5,000 hours unskilled 600 units 1,000 units 5,000 hours semi-skilled 5,000 hours skilled 15,000 hours Extra selling and delivery expenses 27,000 Extra advertising 18,000