An electronics company produces many types of expensive components. A recent contract for a batch of components (KRS) was priced by the companys accountant. Although the company is short of work, the accountant has advised the managing director that the contract should not be accepted because it will result in a loss, as follows:

CONTRACT KRS K K

CONTRACT PRICE 100,000

LESS

MATERIALS 65,000

LABOR 49,000

DEPRECIATION 10,000

VARIABLE OVERHEADS 6,000

FIXED OVERHEAD ALLOCATION 20,000 150,000

LOSS 50,000

The following additional information is available: K10,000 of material, for which there is no other use, is already in stock. If the contract does not go ahead, it will be disposed of at a cost of K1,000. A contract has been agreed for K5,000 worth of stock. The balance of the stock will also need to be purchased. Labour costs include an allocation of supervisors costs of K20,000. If the contract is not accepted, some of the workforce will be made redundant at a cost of K10,000. It has just been realized that the machinery for the contract needs some modification at a cost of K3,000. If the machinery is not used in the contract it will be sold for K5,000. The contract will take 3,600 direct labour hours. REQUIRED: (a) Should the contract be accepted or rejected? Justify your inclusion or exclusion of costs and state what other factors should be taken into account. (b) Before a final decision is made, the company receives a new order for its productions. The following information is available:

Per unit K Selling price 100 Direct materials 45 Direct labour 20 Allocated fixed costs 10 Variable cost 15

To make one unit takes five labour hours. The company does not have the labour hours available to complete contract KRS and accept the new order. Should contract KRS or the new order be accepted? Explain your reasons and give supporting figures.

C. Decision making is not concerned solely with costs and revenues. Give some examples of non-financial considerations that may be taken into account when making various types of decision.