Carol cookies is evaluating a contract from a major supermarket chain which requires production of 20,000 boxes of Crunchies at $18 per box. The resources used per box are as follows:

Grade 1 labor (30 minutes)

Grade 2 labor (15 minutes)

Material A 12 kg

Material B 4kg

Variable production overheads are $1 per box

The MD is keen to take the contract as she thinks that we need to work on this sort of skilled labor. Every couple of months they have a slack period and although we never propose redundancies they do get demoralized.

The financial accountant is reluctant to accept the order because he thinks that we will exceed our capacity and sales of 6,000 boxes of Booster will be lost. Its sale price is $19 per box with cost structure per box is as follows:

Grade 1 labor (20 minutes) = $3.00

Grade 2 labor (30 minutes) = $2.50

Material A 12 kg @0.35= $4.20

Other Materials = $1.60

Variable overheads = $1.10

Fixed overheads ($6 per labor hour) = $5.00

Total cost = $17.40

Crunchies is a new product for new customers. The development work completed so far costs $5,000.

The rate of grade 1 labor is $9 per hour and this type of labor is currently under-utilized because skilled labor is hard to replace. It is company policy to retain these workers on full pay despite the regular shortages of work from them. Grade 2 unskilled labor is and is paid on per hour basis and it can hired as required from the labor market.

Material A is a wheat floor product. It is widely used in the company. Company currently has 60 tonnes of this material. There are also 60 tonnes of Material B , a nut based product in stock, but material B is not currently used and can be sold if the contract is not accepted.

Alternative valuation basis for material A and B are as follows:

	A ($)	B ($)
BOOK VALUE	0.35	0.80
REPLACEMENT COST	0.40	1.20
NRV	0.30	0.60

Company value its stock on FIFO BASIS

The financial accountant currently used absorption costing with fixed overheads absorbed on labor hours basis at a rate of $6 per hour before the contract of Crunchies was offered when the productive labor hours were estimated to be 50,000

Required:

a) Calculate the incremental financial effects of accepting the contract offered by the supermarket.

b) A recalculation of OAR taking into account the revised production scheduling of both contracts if supermarket contract is accepted.