Preparation of project statements for different demand levels and calculations of expected profit

Seeprint Limited is negotiating an initial one year contract with an important customer for the supply of a specialized printed colour catalogue at a fixed contract price of 16 per catalogue. Seeprint's normal capacity for producing such catalogues is 50 000 per annum.

Last year Seeprint Limited earned 11000 profit per month from a number of small accounts requiring specialized colour catalogues. If the contract under negotiation is not undertaken, then a similar profit might be obtained from these customers next year, but, if it is undertaken, there will be no profit from such customers.

The estimated costs of producing colour catalogues of a specialized nature are given below.

The costs below are considered certain with the exception of the direct materials price.

Cost data:

			()
Variable costs per catalogue
Direct materials			4.50
Direct wages			3.00
Direct expenses			1.30
	Output levels
	(capacity utilization)
Semi-variable costs	80%	100%		120%
	()	()		()
Indirect materials	800	47000		74400
Indirect wages	51200	55000		72000
Indirect expenses	6000	8000		9600

Estimated fixed costs per annum:

Depreciation of specialist equipment	8000
Supervisory and management salaries	20000
Other fixed costs allocated
to specialist colour catalogues production	32000

You are required to:

(a) Tabulate the costs and profits per unit and in total and the annual profits, assuming that the contract orders in the year are: (i) 40 000, (ii) 50 000 and (iii) 60 000 catalogues, at a direct material cost of 4.50 per catalogue. Comment on the tabulation you have prepared.

(b) Calculate the expected profit for the year if it is assumed that the probability of the total order is:

0.4 for 40 000 catalogues

0.5 for 50 000 catalogues

0.1 for 60 000 catalogues

and that the probability of direct material cost is:

0.5 at 4.50 per catalogue 0.3 at 5.00 per catalogue 0.2 at 5.50 per catalogue.

(c) Discuss the implications for-Seeprint Limited of the acceptance or otherwise of the contract with the important customer.