Tolek Ltd manufactures and distributes a single product to the motor manufacturing sector. The current costing system is unable to differentiate fixed and variable costs. However, you have extracted the following activity and total data from the system:

Units produced and sold:	300	500	600	800	1,200
Sales (£)	5,600	10,500	15,900	21,200	26,000
Total costs	10,000	11,120	12,180	13,240	14,500
(fixed and variable) (£)
Profit / (loss) (£)	-4,400	-620	3,720	7,960	11,500

The business currently produces and sells 1,000 units per month (which is 75% of current capacity). Beyond the current capacity level, variable costs will rise by 41% per unit and fixed costs will rise (step) by 80%.

Two (mutually exclusive) contract opportunities are under the consideration of the business executive management:

Opportunity #1:

A customer has offered to buy up all of the spare capacity for £4,250.

Opportunity #2:

Another customer wished to buy 595 units at the current standard selling price.

Required:

1. Evaluate the two contract options available to Massey Ltd.

2. Make a recommendation to your executive management.

Answer rating: 100% (QA)

unit prod 300 500 600 800 1200 sales 5600 10500 15900 21200 26000 total FV 10... View the full answer