3 Question 2 (30 marks) Mr. Lee has been asked to review a research project, which to date has cost the company $30,000. If the project proceeds, it will be completed in approximately three months. Mr. Lee has been asked to provide a quotation for a contract of the research findings for a new customer. As a consequence, Mr. Lee will produce the quotation by using relevant costing instead of the usual method of full cost plus pricing. The additional expenses which will be necessary to complete the work are listed below: 1. Materials required for completing the project has just been purchased at a cost of $50,000. It can be used only for this project and it is toxic. If it is not used, it must be disposed of at a cost of $6,000. 2. The project would require 300 hours of skilled labor that is hard to recruit. The skilled labor will be transferred to the project from a production department. The hourly rate is $80 per hour. At a recent meeting, the production department manager claimed that if the men were returned to him they could generates sales of $100,000. The material costs for the sales will be $30,000. 3. The project would require 800 hours of unskilled labor. These are fully employed by the company on jobs where they produce a contribution of $2 per unskilled labor hour. The rate for the employed unskilled labor is $31 per hour, although extra could be hired at $34 if necessary. 4. The project utilizes a special microscope which was purchased a year ago at a cost of $18,000. The microscope has no other use and if it is not used for the project, it has a current disposal value of $10,000. If used in the project, it is estimated that the disposal value will be $7,000. 5. The project is charged with $3,000 per month to cover the general building expenses. Immediately after the project is discontinued, the space occupied could be sub-let for a monthly rental of $4,000. Required: a. Calculate the relevant cost of the project, explaining the reasons for the treatment of each item. (24 marks) b. Discuss the problems that can arise as a result of setting prices using relevant costing. (6 marks) 3 Question 2 (30 marks) Mr. Lee has been asked to review a research project, which to date has cost the company $30,000. If the project proceeds, it will be completed in approximately three months. Mr. Lee has been asked to provide a quotation for a contract of the research findings for a new customer. As a consequence, Mr. Lee will produce the quotation by using relevant costing instead of the usual method of full cost plus pricing. The additional expenses which will be necessary to complete the work are listed below: 1. Materials required for completing the project has just been purchased at a cost of $50,000. It can be used only for this project and it is toxic. If it is not used, it must be disposed of at a cost of $6,000. 2. The project would require 300 hours of skilled labor that is hard to recruit. The skilled labor will be transferred to the project from a production department. The hourly rate is $80 per hour. At a recent meeting, the production department manager claimed that if the men were returned to him they could generates sales of $100,000. The material costs for the sales will be $30,000. 3. The project would require 800 hours of unskilled labor. These are fully employed by the company on jobs where they produce a contribution of $2 per unskilled labor hour. The rate for the employed unskilled labor is $31 per hour, although extra could be hired at $34 if necessary. 4. The project utilizes a special microscope which was purchased a year ago at a cost of $18,000. The microscope has no other use and if it is not used for the project, it has a current disposal value of $10,000. If used in the project, it is estimated that the disposal value will be $7,000. 5. The project is charged with $3,000 per month to cover the general building expenses. Immediately after the project is discontinued, the space occupied could be sub-let for a monthly rental of $4,000. Required: a. Calculate the relevant cost of the project, explaining the reasons for the treatment of each item. (24 marks) b. Discuss the problems that can arise as a result of setting prices using relevant costing. (6 marks)