Clever Engineering is a company that carries out various contracts throughout the UK.

The company has had its offer of 288,000 for a contract in the North-East accepted and work is due to begin in March.However the company has also been asked to undertake a contract on the South Coast-the price offered for this contract is 352,000.The contracts cannot be taken simultaneously due to constraints on staff site management and on plant and machinery available.An 'escape clause' enables the company to withdraw from the North-East contract (if it decides to undertake the South Coast contract instead) but Clever Engineering will have to pay a penalty of 28,000.

The following information is available for each contract:

North-East

South Coast

Materials:

Material X (in stock at original cost)

21,600

Material X (firm order placed at original cost)

30,400

Material X (not yet ordered, current cost)

60,000

Material Y (in stock at original cost)

24,800

Material Z (not yet ordered, current cost)

71,200

Labour - hired locally

86,000

110,000

Site management

34,000

34,000

Staff accommodation and travel for site management

6,800

5,600

Plant on site - depreciation

9,600

12,800

Total Local Contract Costs

248,400

258,400

Head Office Costs (allocated at a rate of 5% of local contract costs)

12,240

12,920

260,640

271,320

Contract Price

288,000

352,000

Estimated Profit on Contract

27,360

80,680

Notes:

1.X,Y and Z are three building materials.Material X is not in common use and has minimal resale value.However it could be used on other contracts as a substitute for another material that currently costs 10% less than the original cost of Material X.The price of Material Y,which is in common use, has doubled since it was purchased originally.This material could be sold for 42,160 or alternatively could be kept for use on other contracts in the following year.

Materials:

Material X:

Relevant Cost:

Relevant Cost:

Material Y:

Relevant Cost:

Relevant Cost:

2.The company is confident that manual labour,both skilled and unskilled,could be hired locally on a sub-contracting basis(that is,they would not be permanent workers)to meet the needs of each of the contracts.

3.The plant which would be needed for the South Coast contract has been owned by Clever Engineering for some years and annual depreciation is 12,800 on a straight-line basis.If the North-East contract is undertaken,less plant will be required but the surplus plant would be hired out for the period of the contract at a rental of 6,000.

4.Salaries and general costs of operating Head Office amount to 108,000 each year.There are usually ten contracts being supervised at the same time.

5.Site management is treated as a fixed cost.

Required:

In the LECTURE:

Calculate the relevant costs of the North-East contract,explaining how you arrived at each relevant cost.Present the relevant costs in a Relevant Cost Statement.

For the SEMINAR:

i.Calculate the relevant costs of the North-East contract,explaining how you arrived at each relevant cost.Present the relevant costs in a Relevant Cost Statement.

ii.Determine which of the two contracts would be more beneficial for Clever Engineering,giving reasons for your answer.