Question B1 Maxi Company is providing a quote for an engineering project that is expected to take one year to complete. The design engineers have analysed the project and have provided the following cost estimate, with the accompanying notes: Notes 15,000 1 40,000 2 3 108,000 96,000 4 5 Direct materials: Material A To be bought in Material B 10,000m @ 4/m original purchase cost Direct labour: Skilled labour, 9,000 hrs @ 12 per hr Unskilled labour, 12,000 hrs @ 8 per hr Supervision costs Annual salary for 2,000 hours 300 hours overtime Bonus Machine deprecation for one year Design engineer costs incurred Total project specific costs Overhead costs absorbed at a rate of 40% of project costs Total costs Profit mark-up (25%) Total quotation price 6 7 50,000 7,500 500 204,000 25,000 546,000 218,400 764,400 191.100 955,500 8 9 Notes: 1. The direct materials required for the project are Materials A and B. With regards to Material A, the total amount required for the project would have to be purchased at a cost of 15,000. The company does not foresee any other use for this material in the future and could sell it for 2 per m. The current purchase price of the material is 5 per m. 2. 3. Skilled labour would be required for a total of 9,000 hours during the year. The labour required could be recruited at an hourly rate of 12. If these existing employees were to be transferred to this project then they would need to be replaced on their existing project work. Replacements for their existing project work would cost 11 per hour. 4. Unskilled labour would be required for a total of 12,000 hours during the year. These employees would need to be recruited at a cost of 8 per hour. 5. The supervisor earns a salary of 50,000 per year for working 2,000 hours, is not paid for overtime work, but if this project goes ahead the supervisor will be paid a bonus of 500 in recognition of the extra work involved. 6. It is company policy to depreciate non-current assets by 25% per year on a reducing balance basis. Maxi Company already has a suitable machine, but it is fully occupied on existing contracts, and it would be very difficult to change to operate on this project. A machine is required for a total of 10 weeks for this project, and fortunately one can be hired in from a reputable supplier for 2,500 per week. The machine has a running cost of 720 per week, which is incurred by the user of the machine. 7. The company has already incurred expenditure of 25,000 in the work done by the design engineers analysing the resource requirements of the project. It is company policy to attribute overhead costs to projects using an absorption rate of 40% of project costs. 9. It is company policy to add a 25% profit mark-up to total costs when setting its prices. (a) Prepare a revised cost estimate using a relevant cost approach to form the [16] basis of a quotation for this piece of work. Include clear statements for the reasons why a particular figure is included, or excluded, and clearly state any assumptions that you make. 8. (b) Describe any non-financial factors that Maxi Company may wish to take into [4] account when submitting a quote for this contract
