M is the holding company of a number of companies within the engineering sector. One of these
Question:
M is the holding company of a number of companies within the engineering sector. One of these subsidiaries is PQR which specializes in building machines for manufacturing companies. PQR uses absorption costing as the basis of its routine accounting system for profit reporting.
PQR is currently operating at 90% of its available capacity and has been invited by an external manufacturing company, to tender for the manufacture of a bespoke machine. If PQRs tender is accepted by the manufacturing company then it is likely that another company within the M group will be able to obtain work in the future servicing the machine. As a result, the Board of Directors of M are keen to win the tender for the machine and are prepared to accept a price from the manufacturing company that is based on the relevant costs of building the machine.
An engineer from PQR has already met with the manufacturing company to determine the specification of the machine and he has worked with a non-qualified accountant from PQR to determine the following cost estimate for the machine.
Introduction to Financial Accounting
ISBN: 978-0133251036
11th edition
Authors: Charles Horngren, Gary Sundem, John Elliott, Donna Philbrick