REQUIRED:

(a) Advise the Managing Director whether the company should accept the offer from South Wales. Your advice should include considering whether or not the factory capacity should be increased.

(b) Explain the factors that have to be kept in mind by the Managing Director before accepting 4 Please turn over the order.

(c) Does it make sense for a company to sell a product at a price below total cost but above marginal cost? Explain the circumstances under which the prices of products could be fixed below marginal cost.

2. Groggs Limited (Groggs") operates a wholesale bakery in Northern England and is currently operating at 80 percent capacity. The Income Statement shows the following data: '000 '000 Sales 800 Less: Cost of Sales 240 80 Direct material Direct Expenses Variable Overheads Fixed Overheads 60 320 700 Profit 100 The Managing Director has been discussing an offer of a contract from South Wales, which will utilize 50 percent of the maximum capacity of the factory. The proposed price is 10 percent less than the current price that Groggs obtains. The factory capacity can be increased by 10 percent at an increased fixed cost of 30,000