Advise the company

IncePargeter manufactures padded carrying cases for laptop computers. The market is currently buoyant, and the company’s factory is working to capacity. The company has been offered the opportunity to compete for a contract for 10 000 cases per year at a selling price of €15 per case. This is below the company’s usual selling price of €17.25. Variable costs of manufacture would be the same as for existing cases, i.e. €5.63. However, in order to be able to take on the contract the company would need to expand its production facilities. For technical reasons it would be impossible to expand production to increase capacity to produce exactly 10 000 additional units. The expansion of facilities would increase capacity to the point where 20 000 additional units could be manufactured. IncePargeter’s sales director thinks it is possible that he may be able to obtain additional orders that will use up the spare capacity. If production facilities were expanded, fixed costs would rise from €283 000 to an estimated €390 000.

You are required to advise the company on whether or not it should expand its production facilities

A business is considering whether or not to invest in a new building. The managers have incurred expenditure of €15 000 on an initial land survey. For capital investment appraisal purposes this expenditure is:

a) a fixed cost

b) a relevant cost

c) a sunk cost

d) an estimated cost.

Solution: