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

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 stock 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 stock which are not required for normal production. This material originally cost a total of 3,125. If not used on this contract, the stock of material L would be sold for 11 per kg.

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

Selling price100

Less Skilled labour38

Other variable costs22

Required:

(a) prepare calculations showing the total relevant costs for making a decision about the contract in respect of the following cost elements:

(1) materials K and L; and

(2) skilled labour.

(b) explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract.