Ennerdale Ltd has been asked to quote a price for a one-off contract. The companys management accountant has asked for your advice on the relevant costs for the contract. The following information is available.

Materials

The contract requites 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.

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 Cost 22

(60)

40

Required:

Prepare calculation showing the total relevant costs for making a decision about the contract in respect of the following cost elements:

Material K and L; and Skilled Labour

Explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract.