Part 2 Relevant costing (10 marks)

ABC Company is making a luxury furniture to order for a customer, but the customer has financial problems. And it is expected that ABC will not obtain any money from this customer in the future.

Costs incurred to date in producing the furniture are $1,200. And ABC has received progress payments of $600 from the customer before his financial problems. ABC has contacted another customer who is willing to buy the furniture for $4,000 once it has been completed.

To complete the remaining work of the furniture, the following costs would be incurred:

(a) Materials: Some wood has been bought at a cost of $520 and remained unused. If the furniture is not finished, remaining wood could be sold for $200. And the partly completed furniture would be sold for scrap for $500.

(b) Further labour costs would be $750. Labour is in short supply, and if the furniture is not finished, the work force would be switched to another job, which would earn $4,000 in revenue, and incur direct material costs of $1000, direct labour costs of $1200 and absorbed (fixed) overhead of $600.

(c) Quality control inspection fees $450. If the furniture is not completed, the quality control contract would be cancelled at a cost of $100.

(d) General overheads of $900 would be added to the cost of the additional work.

Required

Assess whether the new customer's offer should be accepted.