Question 2: (25 marks) Construct Ltd is planning to undertake a project (Project Alpha) for the forthcoming year which will be sold to a multinational company. Research cost to date amount to Rs. 150,000 but is yet to be paid by Construct Ltd. The following additional costs have been estimated by the managing director to complete project Alpha. Materials Two materials are needed for project Alpha - Material A and Material B. Material A has already been purchased at a cost of Rs. 60,000. It is toxic; and if not used in project Alpha, it must be disposed of at a cost of Rs. 5,000. Material B - there are 50 kgs available in inventory which has been purchased at Rs. 400 per kg. Project Alpha will require a total of 150 kgs of this material. The current purchase price if Rs. 450 per kg and this material is regularly used in other projects currently undertaken by Construct Ltd. Labour Project Alpha will require skilled labour which is hard to recruit in the present situation. Workers will have to be transferred from another project (project Beta) which is currently in operation. Project Beta is expected to generate sales of Rs. 150,000 in the next year. The prime cost of these sales is expected to be Rs. 100,000, including Rs. 40,000 for the labour cost itself. The overhead absorbed into this production (project Beta) is expected to be Rs. 20,000. Monitoringteam A monitoring team will be set up to ensure successful implementation of project Alpha. The wages of the staff in this team are expected to be Rs. 60,000 per annum. It has already been decided that when work on project Alpha ceases, the monitoring team will be made redundant. Redundancy and severance allowances are expected to be Rs. 35,000 in one year's time. Machinery Project Alphawill require a specialised machinery which cost Rs. 18,000 three years ago. It has a current disposal value of Rs. 8,000 and if used in project Alpha, it is estimated that the disposal value in one year's time will be Rs. 6,000. Share of general building services Project Alphawill be charged with Rs. 35,000 per annum to cover generalbuilding expenses. The space that will be occupied by project Alpha is currently being sublet to a local community group for gatherings and entertainment at an annual rent of Rs. 7,500. Construct Ltd will advise the group to seek another location for the forthcoming year. Required: (a) Using relevant costing principles, determine the minimum price at which project Alpha can be sold to the multinational company to ensure that construct Ltd break-even on this project. You are also required to explain the reasons for the treatment of each item. (16 marks) In recent board meeting, one of the directors of Construct Ltd has suggested the following: "Lifecycle costing should be used to determine the total cost and total profitability of project Alpha'. (b) In line with the view expressed by the director, discuss the use of lifecycle costing for project Alpha. Your discussion should include examples of costs that would be taken into account as well as the benefits and the challenges that construct Ltd would face by using lifecycle costing. (9 marks)
