Acceptance of a special order The production manager of your organization has approached you for some costing advice on project X, a one-off order from overseas that he intends to tender for. The costs associated with the project are as follows:

You ascertain the following:
1 Material A is in stock and the above was the cost. There is now no other use for material A, other than the above project within the factory, and it would cost £1750 to dispose of. Material B would have to be ordered at the cost shown above.
2 _ Direct labour costs of £6000 relate to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at a cost of £7000.
3 Supervision costs have been charged to the project on the basis of 33'/;per cent of labour costs and will be carried out by existing staff within their normal duties.
4 Overheads have been charged to the project at the rate of 200 per cent on direct labour.
5 The company is currently operating at a point above break-even.
6 The project will need the utilization of machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of £10000 and then disposed of for £5250 at the end of the project.
The production manager tells you that the overseas customer is prepared to pay up to a maximum of £30000 for the project and a competitor is prepared to accept the order at that price. He also informs you the minimum that he can charge is £40000 as the above costs show £32000, and this does not take into consideration the cost of the machine and profit to be taken on the project.
Required:

(a) Cost the project for the production manager, clearly stating how you have arrived at your figures and giving reasons for the exclusion of other figures.
(12 marks)

(b) Write a report to the production manager stating whether the organization should go ahead with the tender for the project, the reasons why and the price, bearing in mind that the competitor is prepared to undertake the project for £30000.
(8 marks)

Note: The project should only be undertaken if it shows a profit.

(c) State four non-monetary factors that should be taken into account before tendering for this project.
(2 marks)

(d) What would be your advice if you were told that the organization was operating below break-even point? Give reasons for your advice.
(3 marks)
AAT Cost Accounting and Budgeting

Transcribed Image Text:

Material A Material B Direct labour () 4000 8000 Supervision 6000 2000 Overheads 12000 32 000