f2 costins

P Ltd is a manufacturing co and has to decide whether to accept an order from Q Ltd to make 100 white painted trays at a selling price of $1 each. A pressing machine would be used for 1 hour to make the trays from some surplus tinplate which P Ltd has in stock. The trays would then be painted white and given a coating of heat proof varnish. The following information has been obtained from P Ltd‘s costing system

$
Revenue 100
Costs
Tinplate from stock (original cost) 200
White paint from stock (original cost) 25
Heat proof varnish (special purchase) 10
Labour (two hours at $10 per hour) 20
Power (one hour at $15 per hour) 15
Depreciation (one hour at $20 per hour) 20
Production overhead (two hours at $25 per hour 50
Total cost 340
Loss 240

The company has decided to reject the order.
Required
a) Use the following information to calculate the relevant costs of carrying out the order and advice the company.
• P ltd has no other use for tinplate. The tinplates could be sold to the scrap dealer for $23
• The varnish used for Q’s order will be purchased specially
• As P Ltd uses the white paint for other work, any paint that is used for the Q Ltd job will have to be replaced. It will cost $31 to replace the paint.
• The worker who would make the tin trays is paid $400 for a 40 hour week even if he has no work to do. The worker will have nothing else to do at the time the trays would be produced.
• The figures of the cost of power is only an estimate as it is very difficult to obtain a precise figure for power costs
• P Ltd calculates the annual depreciation on each item of production equipment and shares this cost between products which use that particular equipment. As the pressing machine originally cost $100 000and is expected to last for 10 years (with zero residual value), the provision for depreciation is $10 000 per year. It is expected that the machine will be used for 500 hours per year hence the $20per hour charge (10000/500)
• The production overhead absorption rate of $25 per labour hour is based on budgeted fixed costs of $500 000per year and budgeted labour hours of 20 000 per year.

b) What qualitative factors should be considered?
c) Should management accept this special order?