Background information GA Group has recently acquired GAM Ltd and Sari Motors. GAM Ltd. is one of the automotive industry's most iconic brands. The company's name is synonymous with years of world-first innovation, responsible for ground-breaking turbocharging technologies that have redefined performance and mobility. From mainstream passenger vehicles to F1 racing cars, GAM Ltd.'s turbo technology has been the boost behind some of the most significant moments in automotive history. Today, the company employs not less than 7,500 employees and 1250 engineers worldwide. In the last decade, GAM Ltd continued its expansion with 2 additional R&D centres (in France and Czech Republic) and 3 additional manufacturing facilities (in Slovakia, Romania, and Ireland). Mr. Craig Balis, the new CEO of the company who took over from Mr. Olivier Rabiller, wants to improve the profitability and liquidity of the company. Thus, under the new leadership, GAM Ltd will continue to set the pace, to create the differentiated high-performance systems that deliver competitive advantage to its customers and help redefine the end user experience through experience, talent and a mindset that challenges convention. Renault, a French F1 racing car engine manufacturer would like to regain the glory it had in the early 2000s. GAM Ltd.'s leadership team is confident that an adapted version of their new cutting-edge technology, the XTF505, could improve Renault's engine performance. GAM Ltd is operating at 90% of its capacity and has decided to tender for the manufacture of the BXTF505 turbo for Renault. During a recent board meeting, Mr. Craig Balis suggested that if the bid is accepted, it is likely GA Group will earn additional revenues from future servicing of Renault's engines. On that basis, the board of GA Group is unanimously ready to accept a price from Renault that is based on the relevant costs of making the BXTF505. Jessica Zhang, the Chief Engineer of Renault, has already met with GAM Ltd to determine the specification of the BXTF505 and she has worked with a junior accountant from GAM Ltd to determine the cost estimate for the BXTF505 as shown below. Due to the poor liquidity of the company currently, a bank overdraft amounting to $20,000 would be required for the project duration. The overdraft would be repaid at the end of the period. The bank's overdraft rate is 18%. Schedule prepared by the junior accountant Note $ Engineering specification 1 1,500 BN59 Direct material 2 61,000 BN60 Direct material Components Direct labour Supervision Machine hire Overhead costs Total 34567 2,500 6,000 12,500 350 2,500 8 5,500 91,850 Notes 1) This cost relates to Jessica's meeting with GAM Ltd for the specification of the BXTF505. This has taken three days of her time and her salary and associated costs are $500 per day. The meeting was solely to discuss the potential manufacture of the BXTF505. 2) The BXTF505 would require 10 000 square metres of BN59. This material is constantly utilised by GAM Ltd. At the moment, only 15 000 square metres are left in inventory from previous works. 10 000 square metres were bought for $6 per square metre and the remainder were bought for $6.30 per square metre. GAM Ltd uses absorption costing as the basis for profit reporting as per IAS 2 and the weighted average basis to value its inventory. The cheapest supplier of the BN59 is selling it for $7 per square metre, and the inventory could be sold for $6.50 per square metre. 3) The BXTF505 would also require 250 metre lengths of BN60. This material is not regularly used by GAM Ltd and would be bought specifically for the manufacture of the BXTF505. The current market price is $10 per metre length, but the sole supplier of this material has a minimum order size of 300 metre lengths. GAM Ltd does not intend to utilise any unused lengths of BN60 and expects that the scrap value would be negligible. 4) The BXTF505 would require 500 components. The components could be produced by Sari Motors, another company within the GA Group. The direct costs to Sari Motors of producing each component is $8, and normal transfer pricing policy within the GA Group is to add a 50% mark up to the direct cost to determine the transfer price. Sari Motors has available capacity which would allow them to manufacture 350 components, but thereafter any more components could only be produced by reducing the volume of components that are currently sold to the external market. These other components, although different, require the same machine time per unit as those required by GAM Ltd, have a direct cost of $6 per component and currently are sold for $9 each. Alternatively, GAM Ltd can buy the components from the external market for $14 each. 5) The BXTF505 will require 1000 hours of skilled labour. The current market rate for engineers with the needed skills is $15 per hour. GAM Ltd currently employs engineers that have the necessary skills at a cost of $12.50 per hour, but they do not have any spare capacity. They could be diverted from their existing duties, the manufacture of the XTF505, if temporary replacements were to be engaged at a cost of $14 per hour. 6) The manufacture of the BXTF505 would be supervised by a senior engineer Mr. Jules Brice who currently works 150 hours per month and is paid an annual salary of $42 000. The project is expected to be completed in one month, and if it goes ahead is likely to take up 10% of Jules's time during that month. If necessary, the supervisor will work overtime which is unpaid. 7) It will be necessary to hire a specialist machine the XN65 Redboost for part of the project. In total the project will require the XN65 Redboost for 5 days, but it is difficult to predict exactly which five days the machine will be required within the overall project time of one month. One option is to hire the machine for the entire month at a cost of $5 000 and then sub- hire the machine for $150 per day when it is not required by GAM Ltd. GAM Ltd expects that it would be able to sub-hire the machine for 20 days. Alternatively, GAM Ltd could hire the machine on the days it requires, and its availability would be guaranteed at a cost of $500 per day. 8) GAM Ltd.'s budgeted fixed production overhead cost for the year totals $200 000 and is absorbed into its project costs using a skilled direct labour hour absorption rate, based on normal operating capacity of 80%. GAM Ltd.'s capacity budget for the year is a total of 50 000 skilled direct labour hours. GAM Ltd.'s latest annual forecast is for overhead costs to total $220 000, and for capacity to be as originally budgeted. Required: Mr. Craig Balis has heard that, for special orders such as this, relevant costing should be used. As the assistant Management Accountant of the GA Group, you are to: 1. Explain how the junior accountant arrived at the estimates shown in the schedule (use template below) (10.5 marks) 2. Discuss whether or not you agree with the estimates using your knowledge of relevant cost analysis (use template below) (13.5 marks) 3. marks) Indicate the relevant cost for each item and the total relevant cost (use template) (10 4. If the policy of the company is to apply a 12% mark-up, what price should GAM Ltd quote? (1 mark) 5. Mention 2 non-financial factors should GAM Ltd consider relevant? Your answer should be specific to this case (5 marks)