The Deal Between the French Champagne House and MPB Ltd Essay

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Discuss if MPB should accept the offer. Clearly show your calculations and support your discussion with the findings

The French Champagne house wants to pay £75,000 to MPB Ltd for the production of 5,000 boule sets.

This implies that the offer price for every boule set is (£75,000 / 5,000) = £15

Engraving the company’s logo will cost £2.50 for every set. This implies that the variable cost is £8 + £3 + £2.50 = £13.50

The total variable costs will be £13.50 × 5,000 = £67,500

The total fixed costs will be £6,000 × 5,000 = £30,000

Therefore, the total costs will be £67,500 + £30,000 = £97,500

By including the additional cost of engraving the logo, the total variable cost for every boule set becomes £13.50. Despite the fact that there is a positive contribution margin, MPB should not accept the offer from the French Champagne house. This is because the deal will result in a loss owing to the inclusion of the foxed costs that will be incurred in the production. The total cost of producing the 5,000 boule sets is £97,500.

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However, the offer given by the company is £75,000. This implies that the company will incur a loss of £22,500. The deal is therefore not worth accepting (Weygandt, Kimmel and Kieso, 2015).

Advise MPB whether or not it should accept the proposition

Revenue (80,000 × £22) £1,760,000

Less: Cost of Sales

Purchases (50,000 × £14) £700,000

Purchases (30,000 × £10) £300,000 £1,000,000

Gross profit £760,000

Fixed Costs

(£480,000 - £180,000) £300,000

Net profit £460,000

MBP should accept the proposition. Outsourcing the manufacturing services to the Chinese company is expected to be beneficial. This is because the company will be able to generate a profit of £460,000 by outsourcing. The total revenues of the company the company will be £1,760,000. The fixed expenses together with the cost of sales amount to £1,300,000. Therefore, this implies that the company will generate a positive return.

List the points MPB should consider before accepting the proposition

There are different points that MPB should consider accepting the proposition. The deal includes outsourcing manufacturing the boule sets to a Chinese company......

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References

Heisinger, K. (2009). Essentials of managerial accounting. New York: Cengage Learning.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. Hoboken: John Wiley & Sons.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial accounting: tools for business decision making. Hoboken: John Wiley & Sons.

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