Question 2 A department at Venta Technology has prepared the following report for 2020. This department has recently faced severe competitive pressures, which has resulted in falling sales and profits over the last 3 years.

Summarised data from the management accounts Budgeted profit and loss account for 12 months

Sales (80,000 units)	5,600,000
Cost of goods sold (see notes 1 and 2)	4,800,000
Gross profit	800,000
Selling general & administrative overheads (see note 3)	800,000
Profit before tax	0

A new customer has placed an order for 10,000 units at 60 per unit. The current capacity of the factory is 90,000 units.

Note 1. Cost of goods sold includes fixed costs of 500,000. All other costs are variable.

Note 2. If the order is accepted there will be additional fixed costs of 50,000. Staff will receive a bonus of 10,000 if the order is completed on time.

Note 3. Sales commission is 10% of sales and is included in the total cost of 800,000. The sales commission on the new order is only 5%. All other costs are fixed

Required:

1. Advise managers whether or not the order will increase the departments profits.

(8 marks)

2. Calculate the minimum price the company should accept for the order. (6 marks)

3. Assume that the company will lose 10% of current sales if the order is accepted. What is the lost contribution if the company loses 10% of current sales? (5 marks)

4. Identify and evaluate what additional information management need about existing and potential customers before finally accepting or rejecting the order. (14 marks)