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 11 000 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

Estimated fixed costs per annum:

Depreciation of specialist equipment ............................ 8 000

Supervisory and management salaries............................ 20 000

Other fixed costs allocated to specialist colour

Catalogues production.................................................... 32 000

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

0.4 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 See print Limited of the acceptance or otherwise of the contract with the important customer.