394 ACCOUNTING FOR MANAGERS
An outside supplier, Cosmo PLC, has quoted a price of £1,000 for each VX-1 for
an order of 100 of these components. However, if Bendix accepts the quote from
Cosmo, the company will need to give three months’ notice of redundancy to staff.
žCalculate the relevant costs of the alternative choices (show your workings)
and make a recommendation to management as to which choice to accept.
žHow would your recommendation differ if Bendix employees were on tempo-
rary contracts with no notice period?
žExplain the significance of a stock valuation of £1,300 for the VX-1 at the end of
the last accounting period.
10.7 Victory Products Ltd manufactures high-technology products for the com-
puter industry. Victory’s accountant has produced a profit report showing the
profitability of each of its three main customers for last year (Table A1.3).
Victory is operating at almost full capacity, but wishes to improve its profitabil-
ity further. The accountant has reported that, based on the above figures, Franklin
Industries is the least profitable customer and has recommended that prices be
increased. If this is not possible, the accountant has suggested that Victory dis-
continues selling to Franklin and seeks more profitable business from Engineering
Partners and Zeta.
Labour is the most significant limitation on capacity. It is highly specialized and
is difficult to replace. Consequently, Victory does all it can to keep its workforce
even where there are seasonal downturns in business. The company charges
£100 per hour for all labour, which is readily transferable between each of the
customer products.
You have been asked to comment on the accountant’s recommendations.
Table A1.3 Victory products profit report
Franklin
IndustriesEngineering
PartnersZeta PLC Other
customersTotalSales 1,000,000 1,500,000 2,000,000 1,500,000 6,000,000
Cost of materials 250,000 600,000 750,000 750,000 2,350,000
Cost of labour 300,000 200,000 300,000 75,000 875,000
Gross profit 450,000 700,000 950,000 675,000 2,775,000
Corporate overheads:
allocated as 30% of sales
300,000 450,000 600,000 450,000Rental 250,000
Depreciation 350,000
Non-production salaries 600,000
Selling expenses 350,000
Administration 250,000
Operating profit 150,000 250,000 350,000 225,000 975,000