Carbotest Corporation manufactures equipment to test for the presence of carbon monoxide in confined spaces. It has just been offered a contract to build some specialized monitoring equipment to test for the presence of carbon dioxide in the freight containers of lorries and railway wagons. The contract offers to pay £152,000 for 1,000 sets of testing equipment, which must be delivered in six months’ time. Carbotest has looked into this opportunity and has produced the following information.
Materials 
The contract will need 40,000 components which Carbotest does not currently use; these cost £3 each. However, it could use up old stock of 5,000 components that it recently tried to sell without success. But £1 will need to be spent on each of them to make them into suitable replacements for 5,000 of the 40,000 components needed. This old stock originally cost £20,000 but now has a scrap value of only £1,000. Each testing set also needs a carrying harness identical to those used for the carbon monoxide testing equipment. Carbotest has 600 of these currently in stock, valued at their cost price of £8 each. The suppliers of this harness have just increased their price to £9, which Carbotest will have to pay for future orders.
Labour
The contract will use five skilled operatives full time for six months. These operatives are paid £1,400 a month gross and are presently employed on the carbon-monoxide-testing production. They will have to be redeployed from this work to the new contract. Their combined output for the six-month period is estimated to have a sales revenue of £60,000,a variable cost of £48,000 and to absorb £8,000 of fi xed overheads. It is thought that one of the factory supervisors (currently with a light workload) could manage the project for 50% of his time. His annual gross pay is £24,000. Carbotest is working at full capacity and has enough orders to keep it busy for 15 months.
Machinery
Three years ago, Carbotest bought a machine for a similar project, which had to be abandoned after two years. It cost £25,000 and was estimated to have a useful life of five years, with a zero residual value. (Carbotest uses the straight-line method of depreciation for all its  fixed assets.) The machine has been ‘mothballed’ for the last 12 months and has been stored out of the way. Carbotest was just about to advertise it for sale at the very reasonable price of £5,000. It is thought that this intensive contract will effectively wear it out. To meet the six-month deadline, Carbotest plans to lease an identical machine for six months at a cost of £500 a month.
Accommodation
Employees have to park their cars on the road outside the factory. As the company is located in a busy area, this is often difficult, with cars having to be parked some distance away. Carbotest is just about to convert a rough piece of land in one corner of its site into an employees’ car park. It hired a professional firm of surveyors to obtain planning permission for this and their invoice for £2,200 has recently been received but not yet paid. The cost of building the car park is £28,000. But if the contract is accepted, this land will have to be used for a temporary building to house the necessary machinery. The construction of this building will cost £8,000 and when the contract is completed, it will be demolished at a cost of £2,000. The car park will then go ahead.
Fixed overheads
Carbotest’s absorption costing system attaches fixed overheads to production on a machine hour basis. The contract is expected to absorb £10,000 of fixed overhead.

Tasks:
State whether each of the above items is relevant or irrelevant to Carbotest’s acceptance of the contract and explain your reasoning. Advise it whether or not to accept the contract. Discuss any other factors the company should take into consideration when making this decision.