River Recreation plc is involved in the design and manufacture of custombuilt rowing boats for the boating enthusiast. The company has just received anenquiry about the possibility of supplying boats to a large corporation, Sports for Water plc

The finance director of Sports for Water plc has informed River Recreation plc that She has priced the rowing boats elsewhere and the maximum price they are willing to pay for each rowing boat is

The management accountant of River Recreation plc has provided you with the following details relating to the production of the rowing boats:

The research department has spent in assessing the environmental implications, if any, as a result of taking on this project. Of this amount, has yet to be paid.

Each rowing boat will require sheets of fibreglass, which is used regularly by the company. At present the company has sheets of fibreglass in stock. These sheets of fibreglass originally cost per sheet. The replacement cost of a sheet of fibreglass is per sheet.

Each rowing boat will also require lengths of timber. The company has lengths of timber in stock which was purchased a few years ago for use in the production of jet skis. The market for jet skis has deteriorated so the company no longer produces this type of equipment. The original purchase price for the lengths of timber in stock was per length. The replacement cost of a length of timber is per length. The net realisable value of the

timber in stock is per slab. If the timber is not used in the production of the rowing boats the company intends to sell it to a local carpentry firm.

Additionally, each rowing boat will require sheets of aluminium. The company has never used this type of material in any of its previous production processes. Therefore, the company expects there will be wastage of aluminium sheets. The purchase price of an aluminium sheet is

The production of the rowing boats requires two certain types of skillset, type A and type B The skilled labour requirement is skilled A hours, and skilled hours, per rowing boat. The rate of pay for both skilled A and labourers is per hour normal time and per hour overtime. All of the skilled labourers are part of the permanent work force. At present there are hours of idle time of skilled A labour. The skilled B labourers will have to work overtime in order to complete the rowing boats in time.

The unskilled labourers are employed on a casual basis and their rate of pay is per hour worked. Each rowing boat will require approximately unskilled hours.

River Recreation plc will experience great difficulty in sourcing an

experienced supervisor for this contract. Therefore, a supervisor currently employed by River Recreation plc with the necessary experience, will be transferred to the job. This supervisor currently earns Her salary will increase by if this transfer takes place. This means that River Recreation plc will have to hire a replacement supervisor for the duration of the contract at a cost of

Each rowing boat will require hours processing time on the factory equipment. If the order is not accepted River Recreation plc will subcontract the factory equipment to Lakeshore Leisure plc at a rate of per hour.

The company estimates that the depreciation charge for using the factory equipment to produce the rowing boats will be

Variable overheads are absorbed at a rate of per skilled labour hour this includes both type A and labour hours

Fixed overheads for River Recreation plc are currently it is anticipated that additional fixed overheads which will be incurred for this project will be absorbed at a rate of per skilled labour hour.

It is company policy to add on to the production cost as an allocation of head office administration costs. Required:

Using relevant costing principles, determine whether River Recreation plc should undertake the contract. Your answer must include an explanination for the inclusion or exclusion of each of the above points.

Answer rating: 100% (QA)

Answer To determine whether River Recreation plc should accept the order from Sports for Water plc we need to calculate the total cost of producing th... View the full answer