George manufactures a product which uses two types of material, A and B. Each unit of production currently sells for $10. A local trader has expressed an interest in buying 5,000 units but is only prepared to pay $9 per unit.
Current costs and revenues are as follows.
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$000
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$000
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Sales
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350
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Less production costs
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Material A - 1 kg per unit
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25
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Material B - 1 litre per unit
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50
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Labour - 1 hour per unit
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75
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Variable overhead
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50
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Fixed overhead
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25
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Non-production costs
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25
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Total cost
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250
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Budgeted profit
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100
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The following additional information has also been made available.
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(a) There is minimal inventory of material available and prices for new material are expected to be 5% higher for Material A and 3% higher for Material B.
(b) George has been having problems with his workforce and is short of labour hours. He currently has the capacity to produce 36,000 units but would have to employ contract labour at $3.50 per hour to make any additional units.
(c) Included in the fixed production overhead is the salary of the production manager. He is stressed and exhausted and has threatened to leave unless he receives a pay rise of $5,000. George would not be able to fulfil any new orders without him.
Required
Evaluate whether George should accept the new order.