Event Trailers Ltd (ETL) manufactures mobile catering facilities for various corporate and sporting events. The company has been approached by Exquisite Catering Ltd, a company that specialises in leasing catering trailers to the event trade. Exquisite Catering Ltd explain that a panel representative from the 2012 Olympics has approached the company to act as the official Olympic caterers and thus the company now intend to purchase an additional ten fully-fitted catering units in order to increase their mobile catering fleet to meet the Olympic contract.

Exquisite Catering Ltd has offered to purchase the units at price of 30,000 per unit and ETL is keen to complete on this contract as Exquisite Catering Ltd is a key player in the event trade and if the bid was successful ETL would become their preferred supplier. One key barrier to successful completion of the project is the tight deadline; the ten vehicles are required to be delivered in five working weeks.

The order for ten units has been costed by the financial accountant at ETL and the details below have been communicated to the Managing Director:

Materials:

(i) Steel costing 30,000 would need to be purchased.

(ii) Internal fixtures and fittings with a stock value of 75,000 would be taken from

inventory; these are regularly used by ETL in manufacturing and would cost 98,000 to replace at current prices.

(iii) Ten tow bar units can be purchased for 650 each; however ETL has the opportunity to

refurbish tow bars from a batch of obsolete trailers awaiting scrapping. The tow bars on the obsolete vehicles originally cost 500 each and would involve 5 hours labour each, charged at 50 per hour, by outside contractors to refurbish. These tow bar units have a scrap value of 200 each.

(iv) Tyres that have an inventory value of 10,000 are currently in stock and will not be replaced. The tyres could be used for another project and would generate a contribution of 12,000.

Assembly:

(v) The trailer construction process is labour intensive and demands 40 hours per unit of semi- skilled labour to assemble the body. Two semi-skilled staff are available for this job: they are paid a fixed wage of 400 per 35-hour week for normal time working, and 25 per hour for overtime.

(vi) 20 hours per unit of specialised labour would be required to assemble and fit the interior fixtures and fittings. The specialised staff are paid a fixed salary equivalent to 50 per hour and are not entitled to claim overtime. ETL currently has specialised staff working on the construction of trailers for another project; the 2012 Rugby Six Nations. The specialised staff would need to be transferred onto the Olympics project and this would result in lost contribution of 50,000.

(vii) As part of the contract, all assembly would need to be supervised by an Olympic work study engineer who would be recruited externally at a cost working day based on a five day working week, 35 hours per week.

Electrical & Safety Testing:

(viii) 2 hours of safety testing would be needed per completed trailer. ETL testing process to ensure each unit meets the appropriate European quality standards. ETL pays a fixed charge of 500 per week for the arrangement, and hourly inspection rates are 100 per hour.

Delivery:

(ix) ETLs standard delivery charge is 6 per lorry-mile; this earns a 200% profit mark up on their variable delivery expenses for a round trip delivery. Exquisite Catering Ltd has requested the trailers be stored in their London depot which is approximately 200 miles one way. Delivery would involve five lorries each carrying two trailers.

Overhead costs:

(x) ETLs normal pricing policy is to recover fixed production overheads at the rate of 20 per semi-skilled labour hour and fixed administrative overheads at of 30 per specialised labour hour.

Other costs:

(xi) ETL arranged for an investigation to be undertaken to determine if they could integrate the use of solar panels into the catering units. The investigation was unsuccessful and ETL currently owe 5,000 to an external company.

REQUIRED:

(a) Using the principles of decision-relevance, calculate the minimum price that ETL would need to charge for the ten trailers. Provide concise explanations in of your calculations.

(b) Draft a report to the management of ETL recommending a course of action and analysing the principal differences between the decision relevant-approach conventional accounting approach, illustrating this from your answer in where appropriate.

QUESTIONS 1

1: Using the principles of decision-relevance, calculate the minimum price that ETL would need to charge for the ten trailers. Provide concise explanations in support of your calculations.