Question Two Required: a) Explain the significance of using relevant costing techniques in decision making. (6 marks) b) Define the following costs and give an example for each: 1. sunk costs 2. variable costs 3. opportunity costs (6 marks) Schwarzwalduhren GmbH produces and sells cuckoo clocks. A customer from the United States has requested a quotation from Schwarzwalduhren to supply 1,500 specialist grandfather cuckoo clocks and is prepared to pay 550 per clock. The following information relates to Schwarzwalduhren AG's costing of the contract: Materials Specialist wood Paint and varnish (2,000 litres @ 65 per litre) Assembly/finishing and packing 200,000 130,000 Direct labour Indirect materials General overheads Supervising costs Managers' salaries 50,000 150,000 300,000 25,000 30,000 The following information is also relevant: 1. The specialist wood of 200,000 is the original purchase cost. This material was bought some years ago and is no longer used by the company for its usual production. If not used for this contract, it can be sold for 25,000. 2. The paint and varnish are currently used by the company for all its products. The historic cost is 65 per litre; however current supplies can be purchased for 62.50 per litre. 3. All direct labour has spare capacity, which is enough for this contract and all labour would continue working. 4. The indirect materials of 150,000 include 5,000, which are no longer required for other production. If not required for this grandfather contract', this 5,000 worth of materials could be sold for 3,000. 5. Managers are expected to take responsibility for all contracts. 6. Although two supervisors have sufficient time to supervise this contract, a goodwill bonus of 1,000 per supervisor is anticipated. 7. It is estimated that 25% of general overheads are incurred as a direct result of accepting this contract. Required (continued): c) Using your own calculations, determine whether the contract should proceed. You should explain all costs. (13 marks) Total 25 marks muly 120