Jacksons Ltd is tendering for two contracts. Details of the contracts are shown below.

Contract Contract 1 Contract 2

Units required 500 300

Unit price (customer expected) 25.00 40.00

You have examined the contracts and resource requirements and have established the following:

Contract Contract 1 Contract 2

Prime cost resource requirements:

Direct materials (contract totals) 1,800 2,500

Direct labour 40 hours 130 hours

Direct expenses 150 machine hours 60 machine hours

Activity-based production overhead

resource requirements:

Production runs 1.50 1.50

Test events 20 70

Materials movements 290 190

Other information:

Direct labour is paid at 10.00 per hour.

Direct expenses are calculated at 4.00 per machine hour.

Activity-based production overhead resource requirements are calculated using the table provided below:

Activity cost pool Period Cost () Cost driver Driver volume

Production scheduling and set - up 21,000 Production runs 150

Product testing 19,000 Number of test events 1,000

Raw materials handling 12,000 Materials movements 4,000 Depreciation 20,000 Machine hours 2,000

Other costs 6,000 Labour hours 500

Total period production overheads: 78,000

1. Calculate the recovery rates for the production overheads of Jacksons Ltd using the ABC system.
2. Calculate the prime costs of the two contracts described.
3. Calculate the full production costs of the two contracts described based on ABC method.

Jacksons Ltd usually calculates selling prices by adding a 60% profit mark-up to total cost.

4. Explain, with reasons and appropriate workings, whether the contract tenders are likely to be successful (from an financial viewpoint only).