Hutter Limited is a small specialist manufacturer of electronic components and much of its output is used by the makers of industrial robotic equipment. One such customer (Schneider plc) has offered a contract to Hutter Limited for the supply, over the next twelve months, of 600 identical components. The data relating to the production of each component are as follows: Material requirements: 4kg of material A1 - see note 1 below 3kg of material B2 - see note 2 below 1 Part No. 981 - see note 3 below Note 1: Material A1 is in continuous use by Hutter Limited. 1,500kg are currently held in stock at a book value of 8.10 per kg but it is known that future purchases will cost 9.70 per kg. Note 2: 2,000kg of material B2 are currently held in inventory. The original cost of this stock was 6.20 per kg but as the material has not been required for the last two years it has been written down to 2.10 per kg scrap value. The only foreseeable alternative use is as a substitute for material B4 (which is currently in regular use by the company) but this would involve further processing costs of 1.80 per kg. The current purchase prices of materials B2 and B4 are 6.30 per kg and 4.10 per kg respectively. Note 3: It is believed that each Part No. 981 can be bought for 34. Labour requirements: Each component would require 4 hours of skilled labour and 3 hours of semi-skilled. A suitable skilled employee is available and is currently being paid 15 per hour. A replacement would, however, have to be hired at a rate of 13 per hour to do the work which would otherwise be done by the skilled employee. The current rate for semi-skilled work is 11 per hour and an additional semi-skilled employee could be hired for this contract. Overheads: Hutter Limited absorbs overheads using a machine hour rate, currently 18 per hour, of which 70% is for fixed overhead and the remainder is for variable overhead. If this contract is undertaken it is estimated that fixed costs will actually increase for the duration of the contract by a total of 6,900. Spare machine capacity is available and each component would require 4 machine hours A price of 200 per component has been suggested to Hutter Limited by the customer, Schneider plc. Required: a) Prepare a statement that shows all the relevant costs and revenues of undertaking the work, and state whether the contract should be accepted. (11 marks) b) Clearly explain why each of the costs relating to each of the following three aspects of this contract have been included or excluded from your statement in a) i Material A1; ii. Material B2, and ili. Skilled labour. (8 marks) c) Briefly explain three additional factors which management ought to consider when deciding whether to accept the contract. (Your answer should make specific reference to the situation faced by Hutter Ltd in this question.) (6 marks)
