Mr. Lee, CEO of a company has been asked to quote a price for a special contract. The customer is not a current customer of the company, but Mr. Lee wants to try and win the contract as he believes that this may lead to more contracts in the future. As a result, he intends to quote a competitive price for the contract. The following information should be considered:

1. One of the companys salesmen has been to visit the customer, to give them a presentation about the companys product, together with a complimentary lunch, the costs of which totaled $1,000.

2. The contract would require 12,000 square meters of Material A. This material is regularly used by the company for producing a profitable product. There is currently 15,000 square meters in inventory, which was bought for $13 per square meters. The current market price of Material A is $13.5 per square meter, and the inventory could be sold for $12.5 per square meter.

3. The contract would require 1,500 square meters of Material B. 1,000 square meters is in inventory at a cost of $5 per square meter. There is no alternative use of the material and can be sold for $3 per square meter. The current market price of Material B is $10 per square meter.

4. The contract would require 300 litres of Material C. This is not a material that is regularly used by the company and there are 600 litres of this material in inventory. The current market price is $10 per litre. It is dangerous and if not used in this contract will have to be disposed of at a cost of $30 per litre.

5. The contract would require 900 hours of skilled labor that is hard to recruit. The skilled labour will be transferred to the contract from a production department. The hourly rate is $80 per hour. At a recent meeting, the production department manager claimed that if the men were returned to him they could generates sales of $200,000. The material costs for the sales will be $50,000.

6. The contract would utilizes a special equipment which cost $18,000 that was purchased two years ago. The net book value is $6,000. This special equipment is currently not used for any production and can be disposed now at a net realizable value of $9,000. If used in the contract, the net realizable value after use is estimated to be $2,000.

7. The contract would be supervised by a senior engineer who currently works 150 hours per month and is paid an annual salary of $720,000. The contract is expected to take one month to complete, and if it goes ahead is likely to take up 10% of the supervisors time during that month. If necessary the supervisor will work overtime which is unpaid.

8. This is based on 500 machine hours for the contract at a predetermined fixed overhead rate of $20 per machine hour.

Required:

a. You are employed as assistant Management Accountant by Mr. Lee. For each of the items identified you are to:

(1) discuss whether or not you agree with the valuation provide in the proposed tender

(2) prepare a revised schedule of relevant costs for the tender and determine the minimum price . (24 marks)

b. From a decision-making point of view, should joint costs be allocated among joint products? What guideline should be used in determining whether a joint product should be sold at the split-off point or processed further? (6 marks)