Johnson Limited started to produce a special product which was demanded by Bark Ltd. When production...

   

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Johnson Limited started to produce a special product which was demanded by Bark Ltd. When production was about 90% complete, JCM Ltd was declared bankrupt and had to liquidate. Production costs incurred to date by Johnson Ltd is GH¢60,000 and progress payments of GH¢20,000 had been received from JCM Ltd prior to the liquidation. The sales department has found another company (JM Ltd) willing to buy the Product for GH¢45,000 once it has been completed. To complete the work, the following costs will be incurred. a. Materials: these have been bought at a cost of GHC18,000. They have no other use but a net realizable value of GH¢8,500. b. Additional labour hours of 4000hrs will be required to complete the product at a rate of GH¢3.2 per hour. Labour is in short supply, and if the production is not continued, the work force would be switched to a new job, which would earn revenue of GH¢35,000. Total variable cost of GH¢15,000 will be incurred on the new job and fixed overhead of GH¢15,000 will be absorbed. c. Professional fees of GHC8,000 will be incurred if the product is to be completed. If the work is not completed, the professional firm's contract would be terminated at a cost of GH¢4,500. d. General overheads of GH¢9,000 will be absorbed and additional variable overhead cost of GH¢5,500 would be incurred to complete the production of the specialized product. Required a. Identify all the costs and revenues that are relevant to the decision to complete and sell and explain why they are relevant to the decision b. Identify all irrelevant costs to the decision and briefly explain why they are irrelevant c. Compute the profit or Loss to be made if the specialized product is completed and sold to Bulk Ltd and indicate whether the offer should be accepted or not. Johnson Limited started to produce a special product which was demanded by Bark Ltd. When production was about 90% complete, JCM Ltd was declared bankrupt and had to liquidate. Production costs incurred to date by Johnson Ltd is GH¢60,000 and progress payments of GH¢20,000 had been received from JCM Ltd prior to the liquidation. The sales department has found another company (JM Ltd) willing to buy the Product for GH¢45,000 once it has been completed. To complete the work, the following costs will be incurred. a. Materials: these have been bought at a cost of GHC18,000. They have no other use but a net realizable value of GH¢8,500. b. Additional labour hours of 4000hrs will be required to complete the product at a rate of GH¢3.2 per hour. Labour is in short supply, and if the production is not continued, the work force would be switched to a new job, which would earn revenue of GH¢35,000. Total variable cost of GH¢15,000 will be incurred on the new job and fixed overhead of GH¢15,000 will be absorbed. c. Professional fees of GHC8,000 will be incurred if the product is to be completed. If the work is not completed, the professional firm's contract would be terminated at a cost of GH¢4,500. d. General overheads of GH¢9,000 will be absorbed and additional variable overhead cost of GH¢5,500 would be incurred to complete the production of the specialized product. Required a. Identify all the costs and revenues that are relevant to the decision to complete and sell and explain why they are relevant to the decision b. Identify all irrelevant costs to the decision and briefly explain why they are irrelevant c. Compute the profit or Loss to be made if the specialized product is completed and sold to Bulk Ltd and indicate whether the offer should be accepted or not.