Q5: (Chapter 2 - Relevant Costing) Satum Ltd is a manufacturer of various types of electric units. Recently one of its large customers, Mars Ltd has offered a contract to Saturn Ltd for the supply of 800 units. Below are the details for the production of each unit: Material X: 4kg is required per unit. Currently 2,500 kg is held by the business and it is constantly used. This material of was originally bought for 60 per kg. It would cost 65 per kg to replace it. Sales value is 50 per kg. Material Y: 6 kg is required per unit. Currently 2.600 kg is held by the business. This material of was originally bought for 43 per kg. The material was not used by the business for last two years. Its scrap value is only 14 per kg. Replacement cost for material Y is 28 per kg. The only foreseeable alternative use is as a substitute for material K (in constant use) but this would involve further processing cost of 5 per kg. The current buying cost of material K is 19 per kg. Material Z: 2kg is required per unit. It is regularly used by the business and currently there is none available in the business. An order for 700 kg is shortly to be placed for another project by the business. The price for this material is 90 per kg, but the supplier allows a bulk discount of 5%, for the entire order, for orders of 2,000 kg and above. Skilled labour: Each unit requires 3 hours of skilled labour. It is currently paid at a rate of 30 per hr and skilled labour is hired on a permanent basis. 930 hours can be provided by members of staff who currently have no work to do due to a quiet time, but still employed by the company. Only taking staff off other work can provide the remaining hours needed for this new project. This other work is charged out to customers at 85 an hour and material cost is 20 per hour. Semi-skilled labour: Each unit requires 2 hours of semi-skilled labour. It is currently paid 9 per hour. If the required semi-skilled labour for this project is provided by the existing members of staff who are busy, the business will have to hire new employees at a rate of 12 per hour. Specialised study: To derive the above estimates, the business had to spend 2,200 on a specialised study. If the contract does not proceed, the results of the study can be sold for 5,100 in the market Overheads: It is Satum's policy to charge a share of the general costs (rent, heating and so on) to each contract undertaken at the rate of 12 for each skilled labour hour used on the contract. If this project is undertaken, the general costs are expected to increase as a result of undertaking the contract by 2,700. Required Calculate the minimum price at which the contract could be undertaken by Saturn Ltd. For each part, you should clearly show supporting workings and provide a brief explanation for your choice (Total: 8 marks)
