The Lakes Co is famous for its Lakes range of hill-walking boots. The management of the company is considering the production for next year. The following information is available:

Wholesale selling price (per pair) 60

Direct materials (per pair) 20

Direct labour (per pair) 18

Production overheads (fixed) 200,000 per year

The company is planning to manufacture 12,500 pairs of boots next year. You are required to:

a). Calculate the absorption cost per pair. (4 marks)

b). Calculate the marginal cost per pair. (2 marks)

c). Calculate the profit or loss if 12,500 pairs of boots are sold. (4 marks)

A mail order company has approached the Lakes Co with a view to selling the Lakes boot through its catalogue. The mail order company has offered two contracts:

Either 2,500 pairs of boots at 45 per pair

Or 5,000 pairs of boots at 37 per pair

As the Lakes Co usually sells through specialist shops, it is not expected that normal sales will be affected. These special orders are within the capacity of the factory and production overheads will remain unchanged.

d). Calculate the total profit or loss for the company on the basis of each of the two contracts offered above and advise the management whether these offers should be accepted. (12 marks)

e). Consider and analyse what other factors, whether qualitative or quantitative, that the management should consider before accepting these additional contracts. (8 marks)