The deal between the French Champagne house and MPB Ltd

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. 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. MPB management must take into consideration whether product quality of the boule sets would remain the same. A decline in the quality of the products would hamper the business in the long run. Therefore, it is imperative to make certain that the standards that have been set can be adhered to by the Chinese company going forward. (Weygandt, Kimmel and Kieso, 2009). A second point to consider is the financial stability of the manufacturing company. It will not be beneficial to MPB in terms of outsourcing production of the boule sets if the Chinese company suddenly shuts down. Another point to consider is employee reaction. Notably, employee morale has a tendency to decline if employees in one division of the corporation are laid off. This can give rise to a workforce that is unhappy and inefficient in other segments or divisions of the company. Subsequently, this can give rise to an increase in expenses (Heisinger, 2009). Another important point for MPB to take into consideration is the business reputation of the Chinese company. The reputation of the company outlines whether the company will be reliable and consistent in the production of the boule sets once an agreement is entered into. In addition, there is the significance of considering the political stability in the country of the prospective manufacturer. The political instability within an nation can give rise to an increase in the manufacturing costs and therefore diminishing the profits to be generated (Weygandt et al., 2009).
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.