QUESTION 1(12 marks; 22 minutes)

Poullus Limited (PL), a high-tech electronics manufacturing company, is currently operating at 70% of its maximum capacity. A new customer in Lesotho has asked PL to provide a special order for 200 virtual reality headsets at R2,500 per unit. The potential customer is not a current customer of PL, but the directors of PL are keen to try and win the contract as they believe that this may lead to more contracts in the future from Lesotho. As a result, they intend pricing the contract using relevant costs.

The following information has been obtained from a four-hour meeting that the Production Manager of PL had with the potential customer:

1.400 kilograms of material A will be required. This is a material that is regularly used by PL and there are 700 kilograms currently in inventory. These were bought at a cost of R250 per kilogram. They have a resale value of R220 per kilogram and their current replacement cost is R260 per kilogram.

2.800 kilograms of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by PL. The minimum order quantity from the supplier is 1 000 kilograms at a cost of R180 per kilogram. PL does not expect to have any use for any of this material that remains after this contract is completed.

3.200 components will be required. These will be purchased from Xboks Limited. The purchase price is R1 000 per component.

4.A total of 260 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is R280 per hour. Currently PL has 80 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of R340 per hour; or (ii) recruiting temporary staff at a cost of R300 per hour. However, if temporary staff are used they will not be as experienced as PL's existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of R420 per hour for this work.

5.20 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of R12,000. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is R140 per hour.

The company absorbs its fixed overhead costs using an absorption rate of R400 per direct labour hour.

The Production Manager is paid an annual salary equivalent to R15,800 per 8-hour day. Pl's practice is to establish selling prices by applying a mark-up on cost of 45%.

Required:

Calculate the relevant cost of building 200 virtual headsets which may help with the pricing decision.

Note:

Present your answer in a schedule that clearly shows the relevant cost value for each of the items identified above and explain each relevant cost value you have included in your schedule and why the values you have excluded are not relevant. (12 marks)