Question 2

Kirin Limited produces and sells wheelie bins to local authorities and recycling

companies. The company has capacity to produce 40,000 units but annual production

and demand is currently limited by the market to 25,000 wheelie bins per year. The

total costs of producing 25,000 wheelie bins are as follows:

Direct materials

Direct labour

Variable overhead

Fixed overhead

Total cost of 25,000 wheelie bins

£

280,000

56,000

39,000

220,000

595,000

The selling price of each wheelie bin is £25.

Required

An order is received from Matt Waste Disposal for 5,000 wheelie bins at a price of £22 each.

Explain, with reasons, whether Kirin Limited should accept this order or not. Explain what

possible adverse consequences there would be in accepting this new order.