The Aylett Co. Ltd has been offered a contract that, if accepted, would significantly increase next year's activity levels. The contract requires the production of 20 000 kg of product X and specifies a contract price of £100 per kg. The resources used in the production of each kg of X include the following:

Grade 1 labour is highly skilled and, although it is currently under-utilized in the firm, it is Aylett's policy to continue to pay grade 1 labour in full. Acceptance of the contract would reduce the idle time of grade 1 labour. Idle time payments are treated as non-production overheads.
Grade 2 is unskilled labour with a high turnover, and may be considered a variable cost.
The costs to Aylett of each type of labour are

The materials required to fulfil the contract would be drawn from those materials already in stock.
Material A is widely used within the firm, and any usage for this contract will necessitate replacement.
Material B was purchased to fulfil an expected order that was not received; if material B is not used for the contract. it will be sold. For accounting purposes FIFO is used. The various values and costs for A and Bare

A single recovery rate for fixed factory overheads is used throughout the firm, even though some fixed production overheads could be attributed to single products or departments. The overhead is recovered per productive labour hour, and initial estimates of next year's activity, which excludes the current contract, show fixed production overheads of £600 000 and productive labour hours of 300 000. Acceptance of the contract would increase fixed production overheads by £228 000.
Variable production overheads are accurately estimated at £3 per productive labour hour.
Acceptance of the contract would be expected to encroach on the sales and production of another product, Y, which is also made by Aylett Ltd. It is estimated that sales of Y would then decrease by 5000 units in the next year only. However, this forecast reduction in sales of Y would enable attributable fixed factory overheads of £58000 to be avoided. Information on Y is as follows:

All activity undertaken by Aylett is job casted using full, or absorption, costing in order to derive a profit figure for each contract - if the contract for X is accepted, it will be treated as a separate job for routine costing purposes. The decision to accept or reject the contract will be taken in sufficient lime to enable its estimated effects to be incorporated in the next year's budgets and also in the calculations carried out to derive the overhead recovery rate to be used in the forthcoming year.
Required:

(a) Advise Aylett on the desirability of the contract. (8 marks)

(b) Show how the contract, if accepted, will be reported on by the routine job costing system used by Aylett.
(6 marks)

(c) Briefly expain the reasons for any differences between the figures used in

(a) and

(b) above.

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Resources per kg of X Labour: Grade 1 2 hours Grade 2 Materials 6 hours AB 2 units 1 litre