QUESTION 4

Becky Ltd is preparing a tender for a project it wants to undertake. The costs associated with the project are as follows:

• Material Y is in stock and cost 2,500 when it was purchased several months ago. There is no use in Becky Ltd for material Y, other than on the project in question, and it would cost 450 to dispose of it.

• The project will require 200m of Material X. Becky already has 50m of this in stock which cost 25 per metre at the time of purchase. The remaining material would need to be purchased and the price has now increased by 2%.

• Material Z would have to be ordered at a cost of 8,600.

• Direct labour costs of 910 relate to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at a cost of 750.

• Supervision costs of 1,200 have been charged to the project and will be carried out by existing staff within their normal duties.

• Overheads amounting to 1,400 have been charged to the project at the rate of 100% on direct labour.

• The project will need machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of 1,500 and then sold for 650 at the end of the project.

• 400 has already been spent preparing for and attending meetings with the potential customer to discuss the project. A further 850 will be incurred in meeting costs if the meeting goes ahead.

Required: a) Calculate the relevant cost of this project.

b) The customer is prepared to pay up to a maximum of 18,000 for the project. Write a report to the production manager stating whether the organisation should go ahead with the tender for the project, stating the reasons why, and explaining how you have arrived at your decision.