Foo Limited has been asked to quote for a special order. The details are as follows: 1 Prices are…

Foo Limited has been asked to quote for a special order. The details are as follows: 1 Prices are to be quoted at order levels of 50,000, 100,000 and 150,000 units respectively. Foo has some surplus capacity and it could deal with up to 160,000 units. 2 Each unit would cost £2 for direct materials, and £12 for direct labour. 3 Foo normally absorbs production and non-production overhead on the basis of 200 per cent and 100 per cent respectively of the direct labour cost. 4 Distribution costs are expected to be £10 per unit. 5 Foo’s normal profit margin is 20 per cent of the total cost. However, it is prepared to reduce this margin to 15 per cent if the order is for 100,000 units, and to 10 per cent for an order of 150,000 units. 6 The additional non-production overhead associated with this contract would be £200,000, although this would be cut by £25,000 if the output dropped below 100,000 units. Required: Suggest (a) a selling price per unit that Foo Limited might charge if the contract was for 50,000, 100,000 and 150,000 units respectively; (b) the profit that it could expect to make at these levels.

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