BubwithGirolamo has been asked by one of its regular customers to supply goods for a special contract. The order is for 1000 units of metal casing, for which the contract price is €27 per unit. Direct labour input per unit is 2 hours, and direct materials input is 4 kg of metal. BubwithGirolamo’s direct labour employees are all paid at a rate of €12.50 per hour. The cost of metal is €4.50 per kg. None of the material is currently in stock. The company currently has spare capacity following the cancellation of a major order earlier in the month. Direct labour employees are paid for a full working week of 37.5 hours, regardless of the state of the company’s order book, but they are currently working only about 60% of the time. Consequently, there would be ample time available to fulfil the special contract.
Identify the relevant costs and revenues that Bubwith should consider in making the decision, and advise whether or not the special contract should be accepted.
Are there any non-financial factors that should be taken into consideration?
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