Daniels Ltd is a civil engineering company based in Atlantis.Contracts are carried out under the supervision of project managers who are sent out from head office and remain on site for the duration of the contract.The project manager recruits local labour and arranges for plant and materials to be provided by head office.

Some time ago, the company successfully tendered for two contracts, which have now become mutually exclusive.It is currently considering which of these to accept.Both jobs would last for 12 months.

The following information about each contact is available:

Jacobs

Arends

R'000

R'000

Contract price

170

180

Penalty payment (this is a condition of the tender, if

offered the job and it is not accepted)

16

8

Material required

Refer Notes 1,2 & 3 as well as further notes a) and b) below

60

94

Broken down as follows:

In store (at cost) - Note 1

20

24

Contracted for - Note 2

0

36

To be ordered (at current cost) - Note 3

40

34

Labour required

Project manager's salary

10

10

Travel and lodgings

4

4

Local recruitment

70

56

Head office

Plant depreciation

6

6

Interest on plant

2

2

General administration

8

8

Notes:

Note 1:This represents material which is on hand

Note 2:This refers to material that Daniels Ltd has contractually agreed to purchase from suppliers but it is not on hand as yet.

Note 3:This refers to material that is neither on hand nor has there been a contractual agreement signed to obtain the material, but it is nevertheless required for the respective contracts.

Further Notes:

a)The materials, which would be used on the Jacobs job, have increased in money value by 60% over their purchase cost.Daniels Ltd has no other use for these materials on any other contract apart from the Jacobs one, but they could be re-sold to other companies in the industry at 90% of their current value.Transport and other selling costs would further decrease the cash inflow from the sale by 16.67% of the selling price.

b)The materials for the Arends job have no other obvious use, but could be sold for scrap if the contract were cancelled.The scrap value would be 10% of cost and costs of transport would be paid by the scrap merchant.It is likely, however, that the materials could be used next year on another contract in substitution for a different material normally costing 20% less than the cost of the materials to be used in the Arends contract.

c)Local labour can be hired as and when required.

d)Plant is depreciated on a straight line basis, and the interest on plant charge is a nominal cost added for accounting purposes.

e)The two contracts would require similar plant, although more plant would be required for the Arends than for the Jacobs job.The plant not required on the Jacobs job would be rented out by head office for R2 000 a year.

f)Head office administration costs are fixed at R25000 for the coming year.This excludes project managers' salaries.

REQUIRED:

a)Present the data to management in a form, which will assist in making the decision as to which job to undertake.Provide notes and assumptions to explain the principles, which have been used in selecting the data and so support any calculations made.(25)

b)List briefly any other factors which ought to be considered before finally making the decision in this case.(5)