Question 1 Palladium Company Limited is considering whether to accept a one-off contract. The customer is offering a price of $11,800,000. Prior to accepting the contract, the production manager briefed management that the total cost will include, direct material, direct labour, direct expenses and suitable overheads. Management's policy is to apply a mark-up of 20% to all contracts. He then provided an analysis detailing the requirement of the contract. The following information is relevant to the special contract: (a) The contract requires 25,000 kilograms of a material: a special paste. Currently the company has 10,000 kilogram in stock from a prior contract. The materials cost $30 per kilogram when it was bought last year. Last month, management paid the Bureau of Standards (BOS) $75,000 to assess its usefulness. Based on advice from the BOS, the material was poisonous and should be disposed on immediately if not used in the contract. (b) The National Waste Management Authority told management the cost of disposal is $150,000, however, management decided to use the material in the contract after incurring $50,000 to purify the same. The current purchase price per kilogram of the special paste is $50. (c) Additionally, the contract also requires 100 gallons of paint. The current price per gallon is $1,100, but 40 gallons are currently in the storeroom. The paints were bought last year at $880 per kilogram and were used on a prior contract. Management was offered $950 per kilogram for each of the 40 gallons, but a decision was made to utilise in the contract. In order to be sold, the containers are required to be cleansed at a cost of $100 per gallon. (d) The one-off contract also requires 500 bags of cement. The entity bought 1,000 bags three months ago to use in another contract. The current purchase price per bag is $1,200 per bag. Twenty percent of the cements bought are in the company's warehouse from last month. The cements were bought for $1,000 per bag. The cements were not properly stored and were found to be too hard. Each bag can be sold for $500 as is. However, they can be re-processed and refined at $675 per bags. The production manager decided to reprocess and use in the contract. (e) 50,000 litres of petroleum are required for the contract at $100 per litre. Additional transportation cost and storage associate with buying the petroleum is $300,000 and $200,000 respectively. (f) Skilled workers are required. It was advised that 2,000 hours are required at $100 per hour. These workers will be employed specifically for this contract. (g) Unskilled workers are currently paid a rate of $50 per hour. The entity employed 20 unskilled workers to work 8 hours per day for five days per week. The contract is expected to last five weeks. However, they are currently employed by the company where they are earning a contribution for the company at $10 per hour

(h) A special machine is to be used in the contract. A similar machine was bought four years ago at a cost of $5,000,000 and which incurred accumulated depreciation of $4,000,000. The machine can be disposed of for $1,500,000 as is. Or, overhauled at a cost of $750,000 and sold for $ 2,100,000. The machine is to be used in the contract based on the directors' decision. (i) The entity has fixed cost of $1,000,000 that is to be charged to the contract. Further analysis indicated that 75% of the fixed cost will continue whether or not the contract is accepted. (j) Finally, the contract requires 500 square feet of space. The space is currently producing 5,000 units product that can be sold for $500 each and requires the following per unit cost: Direct material $175 Variable overheads $25 Direct labour $125 Fixed overheads $75 Direct expenses $50 The space is to be used rather than producing the products based on the board of directors' decision. Reason is, the company wants to establish a long-lasting relationship with the customer by accepting the one-off contract. Required: Advise management whether the contract is feasible.