Question 18.4: A special order Amber Limited has been asked by a customer t...
A special order
Amber Limited has been asked by a customer to supply a specially designed product. The customer has indicated that he would be willing to pay a maximum price of £100 per unit. The cost details are as follows.
| Unit cost | £ | £ |
| Contract price | 100 | |
| Less: Variable costs | ||
| Direct materials | 40 | |
| Direct labour (2 hours) | 30 | |
| Variable overhead | \underline{10} | \underline{80} |
| Contribution | \underline{\underline{20} } |
At a contract price of £100 per unit, each unit would make a contribution of £20. The customer is prepared to take 400 units, and so the total contribution towards fixed costs would be £8000 (400 units × £20). However, Amber has a shortage of direct labour and some of the staff would have to be switched from other orders to work on the special order. This would mean an average loss in contribution of £8 for every direct labour hour worked on the special order.
Required:
Determine whether Amber Limited should accept the special order.
