Problem
Marie and Peter Bridge run a business called MPB Ltd which manufactures and sells a standard model of speakers. They sell each set of speakers for £105. Next year the business plans to manufacture and sell 20,000 sets of speakers. The business's costs for next year are forecasted as follows:
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Manufacturing
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£
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Variable direct materials
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40 per set
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Variable direct labour
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20 per set
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Other indirect variable costs
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15 per set
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Fixed manufacturing costs
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450,000 per year
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Fixed non-manufacturing costs
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30,000 per year
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Required:
i. A large French company has contacted MPB Ltd asking if MPB will produce 5,000 sets of speakers for a worldwide promotion. Each set has to be engraved with the French company's logo and the carrying case must bear its brand name. The extra work involved in this will cost £5 per set. The French company has offered to pay a total of £450,000 for the order. State, with supporting workings and assumptions whether MPB should accept this offer.
A Chinese company has proposed to MPB Ltd that it could produce one of the components used in the manufacturing of the speakers (component A) and supply it to MPB for £10 delivered. This price is guaranteed only for one year. Each speaker set requires 1 unit of component A which is currently costing MPB £18 to produce (£12 of which is avoidable if component A is outsourced). If it accepts the outsourcing offer, redundancy labour costs will be incurred by MPB amounting to £35,000. Assume that MPB has no other use for the released capacity, if it decides to outsource component A.
With supporting workings, advise MPB whether or not it should accept this proposition (ignoring any wider issues).
ii. List and briefly discuss four other factors MPB should consider before deciding whether or not to accept this proposition.