Question 2 [40 Marks]

TellC is a company specialising in the provision of telephone systems for commercial clients. There are two parts to the business: - Installing telephone systems in businesses, either as first-time installations or replacement installations; - Supporting the telephone system with annually renewable maintenance contracts. A potential customer has approached TellC, Pula Company, who wants to install a telephone system in new offices it is opening. While the job is not particularly a large one, TellC is hopeful of future business in the form of replacement systems and support contracts for Pula Company. TellC is therefore, keen to quote a competitive price for the job. The following information should be considered:

a. One of the company's salesman has already been to visit Pula Company to give them a demonstration of the new system, together with a complimentary lunch, the costs of which totalled R400.

b. The installation is expected to take one week to complete and would require three engineers, each of whom is paid a monthly salary of R4 000. The engineers have just had their annual renewable contract renewed with TellC. One of the three engineers has spare capacity to complete the work, but the other two would have to be moved from contract X in order to complete this one. Contract X generates a contribution of R5 per engineer hour. There are no other engineers available to continue with Contract X if these two engineers are taken off the job. It would mean that TellC would miss its contractual completion deadline on Contract X by one week. As a result, TellC would have to pay a one-off penalty of R500. Since there is no other work scheduled for their engineers in one week's time, it will not be a problem for them to complete Contract X at this point.

c. TellC's technical advisor would also need to dedicate eight hours of his time to the job. He is working at full capacity, so he would have to work overtime in order to do this. He is being paid an hourly rate of R40 and is paid all overtime at a premium of 50% over thehourly rate.

d. Two visits would need to be made by the site inspector to approve the completed work. He is an independent contractor who is not employed by TellC, and charges Pula Company directly for the work. His cost is R200 for each visit made.

e. TellC's system trainer would need to spend one day at Pula Company delivering training. He is paid a monthly salary of R1 500 but also receives a commission of R125 for each day spent delivering training at a client's site.

f. 120 telephone handsets would need to be supplied to Pula Company. The current cost of these is R18.20 each. Although TellC already has 80 handsets in inventory. These were bought at a price of R16.80 each. The handsets are the most popular model on the market and are frequently requested by TellC's customers.

g. Pula Company would also need a computerised control system called Swipe 2. The current market price of Swipe 2 is R10 800, although TellC has an older version of the system, Swipe 1 in inventory, which could be modified at a cost of R4 600. TellC paid R5 400 for Swipe 1 when it ordered it in error two months ago and has no other use for it. The current market price of Swipe 1 is R5 450, although if TellC, tried to sell the one they have, it would be deemed to be used and therefore only worth R3 000.

h. TellC would require 1 000 metres of the cable, and it has 200 metres in inventory, which cost R1.2 per metre. The current market price for the cable is R1.30 per metre.

i. You should assume that there are four weeks in each month and that the standard working week is 40 hours long.

Required:

2.1 Prepare a cost summary, using relevant costing principles, showing the minimum cost that TellC should charge for the contract. Make detailed notes showing how each of the costs has been arrived at and explain why each cost has been included or excluded from your cost statement. (35 Marks)

2.2 Explain the relevant costing principles used in part (a) and explain the implications of the minimum price that has been calculated in relation to the final price agreed with Pula Company. (5 Marks)