GHI Ltd. manufactures two different chairs, Trippo and Trappo, for which the following information is available:

Costs per unit Trippo Trappo

Direct materials 75 90

Direct labour 60 80

Variable overhead 105 128

Fixed overhead 90 112

Total costs per unit 330 410

Price 360 450

Units sold 1,500 units 1,000 units

The average wage rate including fringe benefits is 20 per hour. The plant has a maximum capacity of 10,000 direct labour hours for each period. The current production uses only 8,500 direct labour hours of the capacity. GHI Ltd. can hire additional direct labour up to its maximum capacity of 10,000 labour hours.

a) A new customer has offered to buy 400 units of Trippo if GHI Ltd. lowers its price to 300 per unit. How many labour hours will be required to produce 400 units of Trippo?

b) How much will GHIs profit increase or decrease if it accepts this

proposal? (Assume all other prices will remain as before.)

c) The next period the same customer wants to buy 600 units of Trippo at the same price (300 per unit). He underscores that he will find another supplier if GHI is not able to deliver 600 units to that price. How much will the profits increase or decrease if it accepts this proposal?

The sales manager of GHI Ltd. wants to keep this new customer because this is a well-known business. Thus, he thinks that the prices to the other customers could be increased a little in order to compensate for the lower price that is achieved regarding the new customer. He wants to have a piece of advice from you.

d) What is your advice? Please underpin your suggestions.