Win Engineering Plc manufactures specialist equipment for use in the manufacture of boat windows. The company has just finished an order for a French company Revour but has received notice that the company has gone into liquidation and that the order is therefore effectively cancelled. The equipment is highly specialist but an Italian company has agreed to buy the equipment for 42,000 Euros provided that certain modifications are carried out. The exchange rate is expected to be 1.40 Euros to the when the payment is received.

The following information has been obtained:

a) Cost of manufacture to-date (including an apportionment of 15,000 of factory overheads) of the specialist equipment amounted to 35,000

b) Deposits and progress payments received to-date totalled 20,000

c) Conversion costs - materials for the conversion had been ordered two months ago for 4,500 but their current realisable value is only 3,000 and the current purchase price is 3,500. The material is a common material and would be useable on other contracts if not used on the project to convert the French equipment.

d) The 200 hours of specialist direct labour required for the conversion will be acquired from within the factory. The specialist direct labour, employed when required, is currently paid 20 per hour but is fully utilised and would need to be switched from other work. The average contribution per labour hour earned by these workers is 45.

e) Overheads would be unchanged but additional overtime for supervisors amounting to 1,000 would be incurred. The Italian company has offered, as an alternative, to pay 2,500 for the plans, patents and

specifications of the equipment. However, the specialist equipment would have to be stripped down. This would have been the only option anyway if no offers were made for the specialist equipment.

If the specialist equipment is stripped down, the materials could be sold as scrap or reprocessed into materials for a new order. The scrap value of the stripped out material is 12,000 but it would require 60 hours of factory labour at 10 per hour to strip out the valuable materials. Currently the factory has 100 hours of idle labour time a week which is not adjustable in the short term, and would intend to use these workers to do this stripping out. If the stripped out material is reprocessed into materials for a new order, this would save 15,000 but would require the 80 hours input from skilled metal workers who would need to be bought in at 15 per hour.

Required:

Using relevant costing, advise Win Engineering Plc on the appropriate course of action. Your advice should include notes on your treatment of each item including revenues and costs that you deem irrelevant to this decision. Identify qualitative factors that should be considered in arriving at your final decision.