Ennerdale Ltd has been asked to quote a price for a one a one-off contract. The company's management accountanct has asked for your advice on the relevant costs for the contract. The following information is available:

•The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in stock which had been purchased last month for a total cost of £19,600. Since then the price per kilogram for material K has increased by 5%.

•The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of £3,125. If not used on this contract, the stock of material L would be sold for £11 per kg.

•The contract requires 800 hours of skilled labour. Skilled labour is paid £9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P.

•The following information relates to product P:

£ per unit

Selling price………………………..100

Less Skilled labour………………….38

Other variable costs…………………22

Required:

(a) Prepare calculations showing the total relevant costs for making a decision about the contract in respect of the following cost elements:

(1) Materials K and L; and

(2) Skilled labour.

(b) Explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract.