SLS MACHINERY CO. LTD. (SLS) is engaged in the manufacture of specialized machinery. The company has been asked to provide a quotation for building a machine for a large textile industrial unit. SLS’s mechanical manager has obtained following information in a meeting with the potential client. The manager is paid an annual salary equivalent to $ 2,500 per eight-hour day.

The machine would require 120 ft. of wire “AC”, which is regularly used by SLS in production. SLS has 300 ft. of the wire in stock at the cost of $ 65 per ft. The resale value of this wire is $ 63 and its current replacement cost is $ 68 per ft.

50 kg of another Wire grade “BX” and 30 other small components would also be required by SLS for the machine. This Wire would be purchased from a supplier at $ 10 per kg. The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity of the wire will be of no use to SLS after the completion of the contract. The other small components will be purchased from the market at $ 80 per component.

The production process would require 250 hours of skilled labour and 30 machine hours The skilled labours are paid an assured wage of $ 20 per hour and the present spare capacity available with SLS for such category of labours is 100 direct labour hours However, further labour hours may be obtained by either:

Paying overtime at $ 23 per hour; or

Contracting temporary workers at $ 21 per hour. These workers would require 5 hours of supervision by SLS’s existing controller who would be paid overtime of $ 20 per hour.

Last year SLS leased the engine on which the machine would be built at a monthly rent of $ 5,000. It has a spare capacity of 110 hours per month and the variable cost of running the machine is $ 15 per hour.

Fixed overheads are absorbed at the rate of $ 25 per direct labour hour.

Required

1. Compute the relevant cost of producing textile machines. Give brief reasons for the inclusion or exclusion of any cost from your computation.

2. Briefly comment on the importance of costs classification for decision making.