..24 (Evaluating a contract using replacement cost). JB Limited is a small specialist manufacturer of electronic components and much of its output is used by the makers of aircraft for both mvil and military purposes. One of the few aircraft manufacturers has offered a contract to JB Limited for the supply, over the next twelve months, of 400 identical components. The data relating to the production of each component is as follows: Material requirements: 3 kilograms material M, -see note 1 below 2 kilograms material P, -see note 2 below 1 Part No. 678 -see note 2 below Note 1. Material M, is in continuous use by the company, 1,000 kilograms are currently held in stock at a book value of Rs. 4.70 per kilogram but it is known that future purchases will cost Rs. 5.50 per kilogram. Note 2. 1,200 kilograms of material P, are held in stock. The original cost of this material was Rs. 4.30 per kilogramme but as the material has not been required for the last two years it has been written down to Rs. 1,50 per kilogramme scrap value. The only foreseeable alternative use is as a substitute for material P. (in current use) but this would involve further processing cost of Rs. 1.60 per kilogramme. The current cost of material P, is Rs. 3.60 per kilogramme. Note 3. It is estimated that the Part No. 678 could be bought for Rs. 50 each. (ii) Labour requirements. Each component would require five hours of skilled labour and five hours of semi-skilled labour. An employee possessing the necessary skills is available and is currently paid Rs. 5 per hour. A replacement would, however, to be obtained at a rate of Rs. 4 per hour for the work which would otherwise be done by the skilled employee. The current rate for semi-skilled work is Rs. 3 per hour and an additional employee could be appointed for this work. (iii) Overhead. JB Limited absorbs overhead by a machine hour rate, currently paid Rs. 20 per hour of which Rs. 7 is for variable overhead and Rs. 13 for fixed overhead. If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by Rs. 3,200. Spare machine capacity is available and each component would require four machine hours. A price of Rs. 145 per component has been suggested by the large company which makes aircraft. conclusion with appropriate figures for presentation to management: You are required to: (a) state whether or not the contract should be accepted and support your may influence (b) comment briefly three factors which management ought to consider and which their decision