An enquiry has been received regarding a special order for 100 000 units of product X. Each unit of Product X requires the following materials and labour.

Materials        Kg./     Original         Current Replacement      Current Realisable

                        unit     cost / kg                  cost / kg                           value / kg

Material A      1           £21                             £25                                      £18

Material B      2           £33                             £28                                      £20

Material C        1           £20                             £30                                      £25

Material A – this is used to produce all the products that are sold by the firm.

Material B - there are no other alternative uses for Material B if it is not used in the special order

Material C - if the special order is undertaken, the production of another product will be reduced. This product is sold for £350 and the total variable cost, including one unit of Material C is £280.  

Labour

The current wage rate is £10 per hour. Each unit of Product X will require one hour of labour and the additional hours that will result from producing the special order will use 75% of the firm’s current spare capacity.

Overheads

The estimate of the firm’s fixed overheads for the year is £1 million and the special order will result in an increase in total overheads of £80 000. A total of £50 000 has already been spent on ensuring that the product can be produced to the quality requirements of the buyer.

Required

1. Calculate the minimum price that could be quoted for this special order so that the firm covers all the costs that are relevant to this order.

2. Explain the concept of opportunity cost and discuss the way in which it affects decision making in a profit-seeking organisation.

3. Although decision making is only one aspect of the role of an accountant. Discuss all aspects of the accountants’ role in a manufacturing company.