Question

Luxed Construction Ltd (LCL) is a large manufacturing firm with two products in its product mix – SP General and SP Special. LCL produces Component LMN that is used in the manufacture of both its products. LCL’s 2018 books contain the following per unit cost of producing Component LMN:

                              Direct materials                            $ 149

                              Direct labor                                   $ 131

                              Variable overhead                         $ 109

                              Fixed overhead                              $ 120

                                    Total                                        $509

Sydney Sussex Manufacturing’s (SSM) production manager approached LCL offering it a sale of 4100 Component LMN at a price of $461 each, a price less than the LCL’s per unit in-house manufacturing cost of $509. If LCL management agrees to the offer, it will be able to avoid only 40% of its fixed overhead costs. The decision under consideration for LCL’s management is whether to accept or reject SSM’s offer.

Required: Showing all necessary calculations/steps, work out for LCL:

1. The relevant Variable costs, relevant Fixed costs and relevant Total costs for the decision under consideration at LCL.
2. LLC’s production manager approached you as the company’s management accountant asking you to evaluate SSM’s offer and help him make a decision as to whether LLC should accept or reject SSM’s offer. Show your calculations/working out on both the alternatives and suggest financially the best one to the production manager.
3. Briefly explain any four ‘qualitative factors’ that LLC needs to take into consideration before opting for one of the two alterative under requirement A.

Answer 1