Reference no: EM132107018

Questions -

Q1. Lotus Ltd manufactures mobile telephones. The current operating level is 400,000 phones but full capacity is 550,000. The phones normally sell for Sh 1,500 per phone. Manufacturing cost data of 400,000 phones is as shown below:

Manufacturing costs	Sh'000'	Sh'000'
Variable costs	300,000
Fixed costs	187,500	487,500
Selling and administration costs
Variable (freight and commissions) costs	30,000
Fixed costs	60,000	90,000
		577,500

A vendor offers to buy 100,000 phones for export at Sh 1,125 per phone. The buyer will pay for freight and no commissions will be paid. The acceptance of this offer will not affect the present sales. The managing director is reluctant to accept that offer because he believes that the offer price of Sh 1,125 is well below the manufacturing cost per unit.

Required:

(i) Should the offer be accepted?

(ii) What factors should be considered before accepting the order?

Q2. Wassant Ltd manufactures a product that uses components made by the company. Due to market liberalization, the same component can be bought from an importer of the component. The management accountant of Wassant Ltd. has provided the following manufacturing data for the component:

	Shs.
Direct material
10 kg of zero 1 @ Sh 25 per kg	250
Direct labour
Department 1  0.75 hours x Sh 120
2  0.6 hours x Sh 125	165
Variable overheads	80

Production overheads are recovered on basis of 20% of labour cost in both departments. The cost accountant anticipates that three-quarters of fixed overhead will be incurred irrespective of the decision made. The importer is willing to sell the component at Sh 510 per unit.

Required:

a) Advise the management of Wassant Ltd whether to make or buy the component.

b) What other factors would Wassant Ltd consider before making the decision?