1. Ennerdale has been asked to quote a price for a one-off contract. The company's management accountant has asked for your advice on the relevant costs for the contract. The following information is available:

Materials

The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in inventory which had been purchased last month for a total cost of $19,600. Since then, the price per kilogram for material K has increased by 5%.

The contract also requires 200 kg of material L. There are 250 kg of material L in inventory which are not required for normal production. This material originally cost a total of $3,125. If not used on this contract, the inventory of material L would be sold for $11 per kg.

Labour

The contract requires 800 hours of skilled labour. Skilled labour is paid $9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P:

$ per unit $ per unit

Selling price 100

Less:

Skilled labour 38

Other variable costs 22 (60)

40

Finance costs

In order to complete the contract, a member of the finance team will be required to work eight hours overtime. The individual's annual salary is $25,000, and they work a 37.5-hour week. Overtime is paid at a rate of $15 per hour. Alternatively, an experienced contract accountant can be hired to administer the project in 75% of the time it would take the internal finance department member to complete. The contractor's rate is $25 per hour. It took the member of the finance team three hours to put together the information for this quote and no overtime was required.

Required:

• What is the relevant cost of material K which should be included in the contract?
• What is the relevant cost of material L which should be included in the contract?
• What is the relevant cost of skilled labour which should be included in the contract?
• What is the relevant cost of finance which should be included in the contract?
• Are the following statements about Ennerdale's relevant costing system true or false?
• Sunk costs can never be a relevant cost for the purpose of decision-making.
• Fixed overhead costs can never be a relevant cost for the purpose of decision-making.