A company in the civil engineering industry with headquarters in Johannesburg undertakes contracts anywhere in South Africa. The company has had its tender for a job in the North West Province accepted at R288 000 and work is due to begin in December 2021. However, the company has also been asked to undertake a contract on the south coast of South Africa. The price offered for this contract is R352 000. Both contracts cannot be undertaken simultaneously because of constraints on staff site management personnel and on plant available. An escape clause enables the company to withdraw from the contract in the North West Province, provided notice is given before the end of November 2021 and an agreed penalty of R28 000 is paid. The following estimates have been submitted by the company’s quantity surveyor:

Cost estimates	North West R	South Coast R
Materials: In stock at original cost, Material X In stock at original cost, Material Y	21 600	24 800
Firm orders placed at original cost, Material X	30 400
Not yet ordered – current cost, Material Z	60 000
Not yet ordered -, Material Z		71 200
Labor – hired locally	86 000	110 000
Site management	34 000	34 000
Staff accommodation for travel for site management	6 800	5 600
Plant non site – depreciation	9 600	12 800
Total local contract costs	253 520	264 800
Headquarters costs allocated at a rate of 5% on total contract costs	12 676	13 240
TOTAL COSTS	261076	271 640
Contract price	288 000	352 000
Estimated profit	26 924	80360

Additional Information:

1. X, Y and Z are three building materials. Material X is not in common use and would not realize much money if re-sold. However, it could be used on other contracts but only as a substitute for another material currently quoted at 10% less than the original cost of X. This also applies to the firm order for Material X. You may assume that it is not possible to cancel the firm order. The price of Y, a material in common use, has doubled since it was purchased; if used, it would definitely have to be replaced at the new price.
2. With the construction industry not yet recovered from the pandemic, the company is confident that manual labor, both skilled and unskilled, could be hired locally on a subcontracting basis to meet the needs of each of the contracts.
3. The plant, which would be needed for the south coast contract, has been owned for some years and R12 800 is the year’s depreciation on a straight-line basis. If the North West contract is undertaken, less plant will be required but the surplus plant will be hired out for the period of the contract at a rental of R6 000.
4. Salaries and general costs of operating the small headquarters amount to about R108 000 each year. There are usually ten contracts being supervised at the same time.
5. Each of the two contracts is expected to last from March to February, which, coincidentally, is the company’s financial year.
6. Site management is performed by permanent employees who are normally based at the company headquarters.

Required:

You are required, as the management accountant of the company:

1. To present comparative statements to show the net benefit to the company of undertaking the more advantageous of the two contracts. Your statements must include only the relevant costs for each

contract. (12)

2. To explain in detail, the reasoning behind the inclusion (or omission) of any three items relating to your comparative financial statements. (3)