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A Canadian company, Cissay Itd, manufactures leather fashion goods and has decided to set up production in the UK, manufacturing their Elisabeth range of handbags and Victoria range of purses. The range is made from soft leather and hand-finished. The factory has 3 departments, with 2 of them being production (assembly and finishing) and one support department which is staffed by a manager and a payroll clerk. The firm has a contract with a distributor who has ordered 4,000 handbags and 2,000 purses in the first year. The distributor will pay $120 per handbag and f180 per purse. Unit costs Handbag Purse E E Materials 30 50 Assembly labour (at f12/hour) 12 18 Finishing labour (at $8/hour) 16 12 Variable overheads 5 7 Annual fixed production overheads are: E Basis Factory rent 20,000 Floor space Manager's salary (paid direct from Head Office) 35,000 No. of employees Payroll clerk (part-time) 8,000 No. of employees The factory consists of an office, used by the clerk and the manager (20m ); floor space of 25m occupied by the 3 assembly workers and further floor space of 35m occupied by the 5 finishers. Required: (a) Calculate the total absorption costs for a handbag and a purse, absorbing overheads on the basis of production departments' labour hours and on the basis of the number of employees for the support department. Assume that all the variable costs are incurred before the finishing stage. Round your answers to the nearest penny. [10 marks] (b) What is the expected profit for the year? [2 marks] (c) After the first year, your distributor approaches you with a proposal. She offers to buy an extra 2,000 handbags after the assembly stage, to be shipped overseas, where they will be finished and sold under another name. The price she offers is $70 per handbag. What factors will you consider in deciding whether or not to accept this offer? Use calculations in support of your answer where necessary. [8 marks] Total 20 Marks