Case$-$study: SA Steel

SA Steel, a steel erector tendered for the erection of the sub structure of a grain silo. This is a once$-$off contract not expected to be repeated. A summary of the cost estimates used for the purposes of arriving at a tender price is as follows:

R

Direct Materials $$ Steel $60000$

Direct Materials $$ Wiring and ancillaries etc. $10000$

Direct Labour $-$ Engineering: $300$ hours @ R$150$ per hr $45000$

Direct Labour $-$ Unskilled: $1000$ hours @ R$40$ per hr $40000$

Variable Overheads $15000$

Fixed Overheads Absorbed $15000$

Total Estimated Cost $185000$

SA Steel want to tender at a price of R $222000$ by adding on a mark$-$up of $20\%$ to the above costs. Your opinion is required as to whether the cost estimates on which the tender price was based were correct. You have reviewed the working files and have gathered the following information:

$$ Steel was in stock and cost R $60000.$ It is regularly used and would be replaced at a cost of R $65000.$

$$ The wiring was already in stock for the previous job that was cancelled. The wiring has no other use.

$$ Engineering hours are in short supply and earn a contribution per hour of R$500.$

$$ Unskilled labourer$$s are paid a fixed monthly salary of R$6400($equal to an average of R$40$ per hour$).$ Due to the recent cancellation of an order the company expects to have $600$ idle unskilled hours available to work on the job. Any additional unskilled labour required is employed on a casual basis.

$$ Variable overheads accurately represent light and heat costs.

$$ Fixed overheads partly represent an allocation of SA Steel$$s central fixed overheads of R $13000.$ The tender would incur additional fixed costs of R $2000.$

Question $1$

Calculate the relevant cost of the contract. Please show all calculations and explain any factor that you excluded from the calculation.

Question $2$

Calculate a revised tender price if relevant costing principles were applied, and the same percentage mark$-$up was to be added.