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Lawrenson Ltd is a manufacturing company and has produced a made-to-order product (the X5) for a customer at a cost of 50,000, which was to have been sold to the customer for 120,000. The customer has now gone bankrupt, and therefore the X5 will not now be sold to them. Lawrenson has the option of converting the X5 into a different version which it estimates could be sold for 85,000 The conversion would require the following: (1) 1,000kgs of material A. Lawrenson currently has 2,500kgs in stock which was bought last month for 2.00 per kg, although the current purchase price has now increased to 2.15. Material A is regularly used in the Lawrenson's other products. (2) 2,000kgs of Material B. Lawrenson currently has 600kgs in stock which was bought last month for 3.00 per kg although the current purchase price is now 3.50. There is no other use for the material and it has a scrap value of 1.00 per kg. (3) 4,000 hours of skilled labour. Skilled labour is paid a fixed weekly wage and there is currently spare capacity sufficient to provide half the required hours. The remaining hours would be made up through overtime which would be paid at 12 per hour. (4) 3,000 hours of semi-skilled labour. Semi-skilled labour is paid at 6 per hour but is currently fully occupied on other projects. Due to union restrictions, staff will not work overtime and there is no other labour available at such short notice. Therefore the only way to get the required hours is to move staff from other production. Each hour used on this other production currently generates a contribution of 4 per hour (being revenue of 25, material cost of 15 and labour of 6). (5) A machine bought for 30,000 four years ago. The machine is currently being used elsewhere in the business where it generates a present value of 20,000; it has a scrap value of 12,000. A similar replacement machine could be purchased for 15,000 and would have a zero residual value after the conversion project. (6) The project will take place in a factory which is currently empty. The factory is being depreciated and depreciation for the duration of the project will be 10,000. (7) The conversion project will be allocated a share of central overheads calculated at a rate of 4 per skilled labour hour worked. You are the Management Accountant, Bruce Hanson, and the finance director has asked for your assistance in helping him prepare for a board meeting that will decide whether or not Lawrenson should proceed with the conversion of the X5. CONTINUED Required Prepare a briefing note for the finance director to include the following information. a) Calculate the relevant cost to Lawrenson of converting the X5 to a different version. You should clearly explain and show the relevant cost value for each of the items identified above, including any values you have excluded that are not relevant. (21 marks) b) With reference to the relevant cost in (a), recommend whether it is beneficial for Lawrenson to sell the converted product for 85,000. (2 marks)

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