Extract Limited has surplus manufacturing capacity and has been offered a one-off contract. The following resources and
Question:
Extract Limited has surplus manufacturing capacity and has been offered a one-off contract. The following resources and costs would be required to fulfil the special contract.
1. Three employees would have to be transferred from other work in order to meet the skill requirements of the order. Total wages for the expected time spent on the special contract would be 4,360 (including a bonus payment to the three employees of 460, though this is not related to the special contract). The normal work of the three employees would be carried out by sub-contract staff which would cost the company 3,680.
2. 80 kg of material A is required. Extract Limited has 268 kg of Material A in stock. The material which cost 7.60 per kg when purchased, is no longer used by the company in its normal business. The stock could be sold, in whole or part, for 7.00 per kg. The replacement cost of Material A is 8.30 per kg.
3. 135 kg of Material B is required. Extract Limited has 532 kg of Material B in stock. The average cost of the stock of Material B, which is used regularly by the company's business is 10.265 per kg. The replacement cost is 10.60 per kg.
4. Head Office Overheads (production and non-production) are absorbed at 150% of direct labour costs. Estimated incremental overhead costs as a result of taking the special contract would be 1,260.
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Required:
(a) Determine the minimum selling price that could be quoted for the special contract to cover relevant costs.
(10 marks)
(b) Determine the selling price (to the nearest ) to be quoted by Extract Limited if they wish to earn a profit mark-up of 20% of the costs.
(3 marks)
(c) Explain the concept of relevant costs using your analysis on raw materials in part (a) above.
(8 marks)
(d) Outline the limitations of using relevant costs in providing guidance for decision making.
(4 marks)
Expert Answer:
a To determine the minimum selling price that covers relevant costs 1 Direct Labor Costs Total wages for the special contract 4360 Bonus payment to em... View the full answer
