Text: QUESTION 3
Dodo Ltd started to produce a special cement which was demanded by Abas Ltd. When production was about 60% complete, Abas Ltd was declared bankrupt and had to liquidate. Production costs incurred to date by Dodo Ltd is GH400,000 and progress payments of GH200,000 had been received from Abas Ltd prior to the liquidation.
The sales department has found another company (Asuo Ltd) willing to buy the product for GHc400,000 once it has been completed.
To complete the work, the following costs will be incurred:
a. Materials: These have been bought at a cost of GHc140,000. They have no other use but a net realizable value of GHc45,000.
b. Additional labor hours of 5000hrs will be required to complete the product at a rate of GHS30 per hour. Labor is in short supply, and if the production is not continued, the workforce would be switched to a new job which would earn revenue of GHc150,000. Total variable cost of GHc100,000 will be incurred on the new job and fixed overhead of GHc200,000 will be absorbed.
c. Professional fees of GHc60,000 will be incurred if the product is to be completed. If the work is not completed, the professional firm's contract would be terminated at a cost of GH45,000.
d. General overheads of GHc40,000 will be absorbed and additional variable overhead cost of GHc35,000 would be incurred to complete the production of the specialized product.
Required:
a. Compute the profit or loss to be made if the specialized product is completed and sold to Asase Ltd and indicate whether the offer should be accepted or not.
