Question 5 Freezing Limited intends to bid for a contract to manufacture a customised fridge for Winter Limited. The details of the special order are as follows: (a) The company purchased machinery costing $70,000, three years ago, with a carrying amount of $52,000. (b) 100 tonnes of Material XX were in storage, purchased at $1,800. The order requires 300 kg of Material XX, which will cost $2,200 per tonne to buy from the supplier. (c) 200 kg of Material BXX were purchased for $40 per kg. Material BXX will cost $45 per kg to replace. The project requires 600 kg of BXX. (d) Freezing Ltd can manufacture a steel component for the special order at a variable cost of $100. If this is sub-contracted, it will cost $90 per component. (e) The order requires the production employees to be paid $80 per hour. The current rate is $40 per hour. The employees work 40 hours per week. (f) Additional machinery to be purchased for the order is $300,000. Required (a) Discuss how you will treat the costs (a) to (f) above for the special order. Your discussions should use terminologies such as sunk costs, and relevant costs, etc. (b) Discuss how managers can use the information from the costs and management accounting information in a profit-making organisation. (10 +8= total 18 marks) Question 5 Freezing Limited intends to bid for a contract to manufacture a customised fridge for Winter Limited. The details of the special order are as follows: (a) The company purchased machinery costing $70,000, three years ago, with a carrying amount of $52,000. (b) 100 tonnes of Material XX were in storage, purchased at $1,800. The order requires 300 kg of Material XX, which will cost $2,200 per tonne to buy from the supplier. (c) 200 kg of Material BXX were purchased for $40 per kg. Material BXX will cost $45 per kg to replace. The project requires 600 kg of BXX. (d) Freezing Ltd can manufacture a steel component for the special order at a variable cost of $100. If this is sub-contracted, it will cost $90 per component. (e) The order requires the production employees to be paid $80 per hour. The current rate is $40 per hour. The employees work 40 hours per week. (f) Additional machinery to be purchased for the order is $300,000. Required (a) Discuss how you will treat the costs (a) to (f) above for the special order. Your discussions should use terminologies such as sunk costs, and relevant costs, etc. (b) Discuss how managers can use the information from the costs and management accounting information in a profit-making organisation. (10 +8= total 18 marks)
