Question 1 Sophie Plc is involved in the design and manufacture of custom-built Dolls Houses The company has just received an enquiry about the possibility of supplying 300 Houses to a creche, Scoil Beag. The finance director of Scoil Beag has informed Sophie Plc that they have priced the houses elsewhere and the maximum price that they are willing to pay for each house is 3,000. The management accountant of Sophie Plc has provided you with the following details relating to the production of the Dolls Houses: 1. The research department has spent 4,000 in assessing whether there are any environmental implications as a result of taking on this project. Of this amount, 1,500 has yet to be paid. 2. Each house will require 4 sheets of plastic, which are used regularly by the company. At present the company has 1,000 sheets of plastic in stock. These sheets originally cost 50 per unit. The replacement cost of a sheet of plastic is 60 per sheet. If they are not used in the production of the houses they will be disposed of at a cost of 15 per sheet. 3. Each house will also require 5 slabs of timber. The company has 2,000 slabs in stock which were purchased a few years ago for use in another product, the production of which has since been abandoned. The original purchase price for those slabs of timber in stock was 80 per unit. The replacement cost of a slab is 65. The net realisable value of the timber in stock is 40 per slab. 4. Additionally, each house will require 7 steel bars. The company has never used this type of material in any of its previous production processes. Therefore, the company expects there will be 30% wastage of steel bars. The purchase price of a steel bar is 30, excluding any trade discount. The supplier offers customers a 15% discount on the purchase price of all steel bars provided they pay within two months of purchase. Sophie Plc consistently pays its bills within 50 days of purchase. 5. The production of the houses will require two types of skillset, skilled A and skilled B. The skilled labour requirement is 5 skilled A hours and 4 skilled B hours per house. The rate of pay for both skilled A and B labourers is 35 per hour normal time and 45 per hour overtime. All of the skilled labourers are part of the permanent work-force. At present there are 100 hours of skilled A ide labour hours per month. The skilled B labourers will have to work 200 hours overtime in order to ensure that the houses are completed on time. 6. The unskilled labourers are employed on a casual basis and their rate of pay is 15 per hour worked. Each house will require approximately 30 unskilled hours. 7. Sophie Plc will experience great difficulty in sourcing an experienced supervisor for this contract. Therefore, a supervisor currently employed by Sophie Plc with the necessary experience, will be transferred to the job. This supervisor currently earns 65,000. Her salary will increase by 5,000 if this transfer takes place. This means that Sophie Plc will have to hire a replacement supervisor for the duration of the contract at a cost of 28,000. 8. The company estimates that the depreciation charge for using the factory equipment to produce the houses will be 8,000. 9. Variable overheads are absorbed at a rate of 55 per skilled labour hour (this includes both type A and B labour hours). 10. Incremental fixed overheads are absorbed at a rate of 20 per skilled labour hour (this includes both type A and B labour hours). 11. It is company policy to add 25% on to the production cost in order to ascertain the selling price. Requirement: (a) Provide a brief explanation, using examples from the question for each of the following terms: () Opportunity cost (ii) Sunk cost (in) Committed cost (b) Using relevant costing principles, determine whether or not Sophie Plc should undertake the contract. Your answer must include an explanation for the inclusion or exclusion of each of the above points (C) List four qualitative factors that should be considered before a final decision is made
