A company is considering whether to accept a one-off contract. The customer is offering a price of $3,900,000 to provide landscaping services. The production manager has indicated to management that the total cost will include, direct material, direct labour, direct expenses and suitable overheads. Managements policy is to apply a mark-up of 35% to all contracts. The following information is relevant to the special contract:

(i) The contract requires 20,000 kilograms of grade A topsoil: Currently the company has 10,000 kilograms of Grade A soil in stock from a prior contract. The soil cost $65 per kilogram when it was bought last year. A customer in Lucea has offered to buy the current stock of Grade A soil for $70 per kilogram, provided it is transported to the customer.

The cost of transporting it to Lucea is $10,000, however, WL decided to use the material in the contract. The current purchase price per kilogram of the Grade A soil is $60.

(ii) The contract also requires 1000 exotic plants. The current unit price is $480, but 400 plants are currently in the nursery. The plants were bought last year at $450 per kilogram. However, it was determined that these plants were infected by a fungus and would require treatment at a cost of $36,000. Management was offered $400 per plant, as is, without the fungal treatment however a decision was made to utilise in the contract.

(iii) The one-off contract also requires 50 bags of fertilizer. WL bought 40 bags four months ago to use on another project at a price of $3600 per bag, that project was cancelled. The bags of fertilizer can be sold to a competitor for $3800. The current purchase price per bag is $4,100.

(iv) Skilled workers are required. It was advised that 190 hours are required at $370 per hour. These workers will be employed specifically for this contract.

(v) Unskilled workers are currently paid a rate of $240 per hour. WL employs 10 unskilled workers to work 8 hours per day for five days per week. The contract is expected to last seven weeks. However, they are currently employed by the company where they are earning a contribution for the company at $260 per hour. For this project the company will need 4 of the unskilled workers.

(vi) The entity has fixed cost of $900,000 that is to be charged to the contract. Further analysis indicated that 70% of the fixed cost will continue whether or not the contract is accepted.

Required:

(a) Advise management on the feasibility of the contract after preparing a cost and profit statement based on the above. (20 marks)