JB Limited is a small specialist manufacturer of electronic components and much of its output is…

JB Limited is a small specialist manufacturer of electronic components and much of its output is used by the makers of aircraft for both civil and military purposes. One of the few aircraft manufacturers has offered a contract to JB Limited for the supply, over the next twelve months, of 400 identical components. The data relating to the production of each component is as follows: (i) Material requirements: 3 kg material M1 – see note 1 below 2 kg material P2 – see note 2 below 1 Part No. 678 – see note 3 below 1.Material M1 is in continuous use by the company. 1000 kg are currently held in stock at a book value of £4.70 per kg but it is known that future purchases will cost £5.50 per kg. 2. 1200 kg of material P2 are held in stock. The original cost of this material was £4.30 per kg but as the material has not been required for the last two years it has been written down to £1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for material P4 (in current use) but this would involve further processing costs of £1.60 per kg. The current cost of material P4 is £3.60 per kg. 3. It is estimated that the Part No. 678 could be bought for £50 each. (iii) Overhead: JB Limited absorbs overhead by a machine hour rate, currently £20 per hour of which £7 is for variable overhead and £13 for fixed overhead. If this contract is undertaken it is estimated that fixed costs will increase for the duration of the contract by £3200. Spare machine cap

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