projects ammended) (1).pdf 1/2 Dynamic Projects (Pty) Ltd undertake a number of specialised engineering projects on behalf of its clients. The financial director is concerned that company is expecting to make a loss on one of its uncompleted projects, Project Orion. They have therefore suggested that the project is abandoned now in order to limit the overall loss that will be made. The following information relating to Project Orion has been collated: Option 1: - Complete the project: R R Costs incurred to date 14 000 000 Estimated costs to complete: Direct materials (note 1) 1 000 000 Direct labour (note 2) 2 750 000 Overheads (note 3) 2 250 000 6 000 000 Total estimated costs 20 000 000 Contract price (note 4) 17 000 000 Estimated loss (3 000 000) Option 2: - Abandon the project: R Costs incurred to date Contract price (note 4) Estimated loss R 14 000 000 14 000 000 Notes: 1. The estimated direct material cost to complete the project is made up of materials on order and materials still to be ordered. A detailed analysis of these costs is given below: 1.1. Materials on order to search 1/2 1.1. Materials on order: An order has been placed with a supplier for the supply of material C. The company has already paid a deposit of R100 000 (included in the costs incurred to date of R14 million). The total remaining cost of the order is: B Balance of purchase price 600 000 Delivery costs 150 000 Total remaining cost 750 000 If Dynamic Projects cancels the order, it will loose the deposit and will be liable to pay 60% of the balance of purchase price. The company will however not incur the delivery costs. 1.2. Materials to be ordered The following materials would still need to be ordered and used if the projected was to be completed: Material A (20 000 kg at R8 per kg) Material B (2 000 kg at R45 per kg) Total remaining cost R 160 000 90 000 250 000 2. Direct Labour costs are made up of the following amounts arch 2. Direct Labour costs are made up of the following amounts: R Project Engineer 500 000 Other skilled labour (10 000 hours at R100 per hour) 1 000 000 Unskilled labour (50 000 hours at R25 per hour) 1 250 000 2 750 000 The Engineer was specifically employed for Project Orion on a two year contract. The R500 000 represents the salary payable to the Engineer for the remaining one year of his contract. If the project is abandoned, Dynamic Projects will still be liable to pay him the full R500 000. 60% of the other skilled labour can be transferred to other projects, but the remaining other skilled labourers would be retrenched. Retrenchment costs of R300 000 will be incurred. The unskilled labour is hired on a daily basis and if the contract is abandoned no wage or retrenchment costs will be incurred. 3. 60% of the overheads are variable. 4. Whilst the full contract price is R17 million, the client has agreed to reimburse Dynamic Projects for the costs incurred to date of R14 million if the project is abandoned at this stage. The managing director, not being to sure about the financial director's suggestion, has approached you to assist the company in deciding whether the project should be abandoned or not. REQUIRED Marks Sub Total total search al Worlact. The R500 000 represents the salary payable to the Engineer for the remaining one year of his contract. If the project is abandoned Dynamic Projects will still be liable to pay him the full R500 000 60% of the other skilled labour can be transferred to other projects, but the remaining other skilled labourers would be retrenched. Retrenchment costs of R300 000 will be incurred. The unskilled labour is hired on a daily basis and if the contract is abandoned no wage or retrenchment costs will be incurred. 3. 60% of the overheads are variable. 4. Whilst the full contract price is R17 million, the client has agreed to reimburse Dynamic Projects for the costs incurred to date of R14 million if the project is abandoned at this stage. The managing director, not being to sure about the financial director's suggestion, has approached you to assist the company in deciding whether the project should be abandoned or not. REQUIRED Marks Sub- Total total (a) Based on the cost and revenue information given above, advise the managing director on whether the project should be abandoned at this stage or whether it should be completed. You are required to clearly show which costs and revenues are relevant to the decision TOTAL MARKS search