Jones Limited has been asked to provide a quotation for a contract to build a new engine. This is for a new customer and the directors of Jones Limited are keen to try and win the contract as they believe that this may lead to more contracts in the future. As a result the directors intend pricing the contract using relevant costs.

The following information has been obtained from a two-hour meeting that the Production Director of Jones Limited had with the potential customer. The Production Director is paid an annual salary equivalent to 1,200 per 8-hour day.

110 square metres of material A will be required. This is a material that is regularly used by Jones Limited and there are 200 square metres currently in inventory. These were bought at a cost of 12 per square metre. They have a resale value of 10.50 per square metre and their current replacement cost is 12.50 per square metre. 30 litres of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by Jones Limited. The minimum order quantity from the supplier is 40 litres at a cost of 9 per litre. Jones Limited does not expect to have any use for any of this material that remains after this contract is completed. 60 components will be required. These will be purchased from Smith Limited. The purchase price is 50 per component.

A total of 235 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is 11 per hour. Currently Jones Limited has 75 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of 14 per hour; or (ii) recruiting temporary staff at a cost of 12 per hour. However, if temporary staff are used they will not be as experienced as Jones Limiteds existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of 18 per hour for this work.

25 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of 600. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is 7 per hour. The company absorbs its fixed overhead costs using an absorption rate of 20 per direct labour hour.

Required:

(a) Calculate the relevant cost of building the new engine.