Mallett plc has the following income and expense statement based on absorption costing principles: Product: R S T Total 000s 000s 000s 000s 820 660 450 1,930 320 Revenues Less: Direct Materials Direct Wages Production overheads (fixed) Gross Margin Selling & admin overheads: Variable Fixed 190 90 220 250 230 50 130 150 180 90 30 720 600 230 380 50 100 70 40 40 30 40 (40) 120 180 Net Profit 50 80 From the above information, the Managing Director has suggested that the company discontinues product T. This does mean there will be spare capacity in the factory but the MD suggests there is no point in using resources to make a product which is making a loss. However the company has been approached by a local school which is interested in Mallett producing a special "one-off' order for them, but would like the price to be kept as low as possible. The company could undertake the order if it stopped producing product T. The new order would need the existing direct labour used for product T and would also use 60,000 of direct materials. The order could be produced on the existing machines in the factory, apart from one special machine that would need to be hired costing 20,000. There would be no selling costs incurred. Required: Re-draft the above information to provide a more useful statement and consider the various options available to Mallett plc. You should include a calculation of the minimum price at which the new order could be sold to the local school.

2000 000 Mallett plc has the following income and expense statement based on absorption costing principles: Product: R S T Total 0005 000 Revenues 820 660 450 1.930 Less: Direct Materials 320 250 150 720 Direct Wages 190 230 180 600 Production overheads (fixed) 90 50 90 230 Gross Margin 220 130 30 380 Selling & admin overheads: Variable 50 40 30 120 Fixed 100 40 40 180 Net Profit 70 50 (40) 80 2:28| 2 23 From the above information, the Managing Director has suggested that the company discontinues product T. This does mean there will be spare capacity in the factory but the MD suggests there is no point in using resources to make a product which is making a loss. However the company has been approached by a local school which is interested in Mallett producing a special "one-off" order for them, but would like the price to be kept as low as possible. The company could undertake the order if it stopped producing product T. The new order would need the existing direct labour used for product T and would also use 60,000 of direct materials. The order could be produced on the existing machines in the factory, apart from one special machine that would need to be hired costing 20,000. There would be no selling costs incurred. Required: Re-draft the above information to provide a more useful statement and consider the various options available to Mallett ple. You should include a calculation of the minimum price at which the new order could be sold to the local school