Citrus Berry Limited manufactures a range of jams and marmalades which it sells under its own brand name in supermarkets throughout Ireland. The company has been in operation for twenty years and is currently operating at 80% of its full manufacturing capacity. One of its top selling products is Seville marmalade with Champagne. Recently, Barati, a low-cost supermarket chain, approached Citrus Berry Limited and asked if it would be interested in supplying this Seville marmalade and allow it to be sold under the Barati brand in its supermarkets as part of a one-off, three month promotion. To supply all of its supermarkets during the three-month promotion, Barati requires50,000 jars of Seville marmalade per month and has offered to pay Citrus Berry Limited 0.85 per jar. The following information, relating to the production of one jar of Seville marmalade with Champagne, is available: 1. Each jar of Seville marmalade requires 0.125 kg of Seville oranges. Citrus Berry Limited purchases Sevilleoranges in bulk at a price of 1.60 per kg. 2. To manufacture a jar of Seville marmalade 0.250 kg of sugar is required and the company purchases sugarfor 0.32 per kg from its regular suppliers. 3. Citrus Berry Limited adds 0.015 litres of Champagne to each jar of Seville marmalade. It purchases Champagne directly from a French chateau for 5.25 per 0.75 litre bottle. 4. The marmalade is sold in glass jars which Citrus Berry Limited purchases from its suppliers in batches of 100,000 for 24,000. These jars are in constant use in the manufacture of a variety of Citrus Berry products. 5. Citrus Berry Limited applies fixed production overheads to products based on machine hours. Budgeted fixed production overheads allocated to Seville marmalade with Champagne for the year amount to 45,000 and the company expects that in total 100,000 machine hours will be spent manufacturing this marmalade. The production team in Citrus Berry Limited calculated that on average each jar of marmalade requires a total of six minutes of machine time. Variable manufacturing overheads have been calculated at 0.08 per jar. 6. Each jar of marmalade supplied must have a Barati label. The labels cost 5,000 for a batch of 500,000 and if not used for this contract they would be scrapped. 7. Another jam manufacturer has offered Citrus Berry Limited 10,000 per month to lease machinery that would be required to produce the marmalade for Barati. Requirement (a) Based on the information provided above, recommend whether Citrus Berry Limited should accept the contract to produce Seville marmalade with Champagne for the low-cost supermarket chain. You should provide calculations to support your recommendation. (15 marks) (b) Assume that the company does NOT have any spare manufacturing capacity but has been approached by Barati, the low-cost supermarket chain, to supply Seville marmalade with Champagne at a price of 0.85 per jar. Citrus Berry Limited has found another marmalade manufacturer based in England who is willing to make the product and supply it to Citrus Berry Limited at a fixed price of 0.68 per jar. However, Citrus Berry Limited must provide the labels (see 6 above) to the supplier and pay transport costs to bring the product from England to the Barati warehouse in Ireland. These transport costs are estimated to be 12,400 in total. (0) For the situation explained at (b) above, recommend whether Citrus Berry Limited should accept the contract to produce Seville marmalade with Champagne for the low-cost supermarket chain. You should provide. calculations to support your recommendation (8 marks) (ii) Briefly outline any TWO qualitative factors that should be considered before a final decision is made regarding whether to outsource production of the Seville marmalade with Champagne to the English supplier. (2 marks) [25 marks]
