Orange Box Limited (OBL) is a small specialist manufacturer of specialist electronic components, selling much of its output to both civil and military aircraft manufacturers.

It is 1 December 2021 and one of these aircraft manufacturers has offered a contract to OBL for the supply of 200 identical components over a two-week period (1 January 2022 14 January 2022). Whilst this is not a particularly large contract for OBL, the Board of Directors is hopeful that significantly more work will follow.

The data relating to the production of each component is as follows:

Material requirements

3 kg material X1

Material X1 is in continuous use by the company. 500 kg are currently held in inventory. These materials were purchased for 5.15/kg but it is known that future purchases will cost

5.50/kg

2 kg material X2

600 kg of material X2 are held in inventory. The original cost of this material was 3.55/kg but, as the material has not been required for the last two years, it has been written down to its scrap value of 1.50/kg. The only foreseeable alternative use is as a substitute for material X4 (in current continuous use) but this would involve further processing costs of

2.50/kg. The current cost of material X4 is 4.50/kg.

1 component JKL

There are 500 components of JKL in inventory. These originally cost 50 each but have no other use in OBL.

Labour requirements

Each component would require five hours of skilled labour and five hours of semi-skilled labour.

• Skilled labour is currently paid 15/hour. Replacement workers would, however, require to be hired at a rate of 14/hour for the work which would otherwise be done by the skilled employees.

• The current rate for semi-skilled work is 12/hour and OBL will require to hire these workers as the company currently has no semi-skilled employees.

There is also a requirement for two weeks of time for a specialist engineer who is paid a weekly salary of 1,000 for working a 40-hour week. She would be required to be removed from another contract (Contract ZZZ) which generates a contribution of 5 per engineer hour. There are no other engineers available to continue with Contract ZZZ if she is taken off this contract. This would mean that OBL would miss its contractual deadline on Contract ZZZ (14 January 2022) by two weeks and would require to pay a one-off penalty of 2,500. As there is no other work currently scheduled for the engineer after 14 January 2022, it will not be a problem for OBL to complete Contract ZZZ at this point.

The supervisor who will be responsible for the new contract with the aircraft manufacturer should it be won, is paid an annual salary of 52,000. She has the capacity within her existing workload to supervise this new contract. It is OBL corporate policy to allocate supervisor salary costs to individual contracts on the basis of time spent.

Overheads

OBL absorb overheads by a machine hour rate, currently 22/hour, of which 8 is for variable overheads and 14 for fixed overheads. If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by 5,500. Spare machine capacity is available and each component would require four machine hours.

Other information

The CEO of OBL required to hold a meeting with the CEO of the aircraft manufacturer in November 2021 to discuss the proposed contract requirements. The costs of this meeting were 500. A contract price of 225 per component was suggested by the CEO of the aircraft manufacturer after the meeting.

Required:

1. Advise the Board of Directors whether the contract should be accepted. Support your conclusion with appropriate figures and explanations. Show all workings.

1. Comment on four factors that the Board of Directors ought to consider and which may influence its final decision.

500 maximum word limit)

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