E4–9 Special order Time allowed: 10 minutes Cosi Ltd produces and sells a single product, a fan called a tutte. Annual production capacity is 100,000 machine hours. Annual demand for tuttes is 80,000 fans. The selling price is expected to remain at £12 per fan. Cost data for producing and selling tuttes are as follows:

Cosi Ltd has 2,000 tuttes in stock that were incorrectly painted. The company has two choices:
1 sell these lower quality fans through the normal distribution channels at a reduced price or 2 scrap them at a net cost of zero.
Sales of these lower quality fans are not expected to affect regular sales of tuttes.
Determine and justify the minimum price per fan that would have to be received in order to make it worth while selling the lower quality fans rather than scrapping them.

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Variable costs (per unit) Direct materials, labour and overhead 5.80 Selling costs 2.00 Fixed costs (per year) 000 Fixed production costs 70,000 Fixed selling costs 40,000