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Question B1 A small contractor has been asked to quote for a contract that is larger than he would normally consider. The contractor would like

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Question B1 A small contractor has been asked to quote for a contract that is larger than he would normally consider. The contractor would like to obtain the job as he does have surplus capacity. The estimating and design department has spent 200 hours in preparing drawings and the following cost estimate: Cost Estimate Direct materials: 3,000 units of X at 10 (original cost) 30,000 100 units of Y 11,250 Direct material to be bought in 12,000 Direct labour: Skilled staff, 2720 hours @ 5 per hour 13,600 Depreciation on cutting press: Depreciation (straight line) 1,000 Subcontract work 20,000 Supervisory staff 6,150 Estimating and design department: 200 hours @ 10 per hour 2,000 Overtime premium for 50 hours 500 96,500 Administration overhead @ 5% of above costs 4,825 101,325 Notes: 1) A sufficient inventory of raw material X is held in the stores. It is the residue of a quantity bought some ten years ago. If this inventory is not used on the prospective contract it is unlikely that it will be used in the foreseeable future. The net resale value is thought to be 20,000. 2) Material Y is regularly used by the contractor on a variety of jobs. The current replacement cost of the material in inventory is 130 per unit. 3) Skilled Staff are paid on a time basis for a 40-hour week. It is considered that one extra worker will be required temporarily for three months (12 weeks) if the contract is obtained. His salary of 100 per week is included in the estimate of 13,600. 4) The cutting press is fully occupied. If it is not being used by the contractor's own workforce it is being hired out at 500 per week. The job will require 4 weeks on the cutting press. 5) The additional subcontract work is the estimated cost for the work. 6) It is not considered that it would be necessary to employ any additional supervisory staff. The estimated cost of 6,150 includes an allowance of 1,000 for overtime that it may be necessary to pay to the supervisors. 7) The expense of the Estimating and Design department is predominantly fixed but the overtime payments were specifically incurred to get the drawings and plans out in time. 8) The administrative expense is a fixed cost. This is the established method of allocating the cost to specific contracts. (a) It is considered that any quotation higher than 100,000 will be unsuccessful. You are required to prepare a revised cost estimate using a relevant cost approach. Cleary explain your rationale for each cost. State whether you consider that the revised calculations can provide support for a quotation below 100,000. (b) Comment on the use of relevant costing: (i) For decision making (ii) For cost control

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