Question information:

The CEO of ABC has recently been on a business trip to China, where he was approached by the management of China Electronics, a major global electronics manufacturer. China Electronics is looking to expand into Africa, using South Africa as a gateway. However, China Electronics lacks a suitable business partner in South Africa. At this business meeting, ABC was asked to provide a quotation for a component of a new electronic device that China Electronics would be marketing in Africa. The CEO of ABC is very excited about this opportunity as it would expose the company to extensive growth opportunities available in the rest of Africa.

You have been tasked with preparing the quotation using relevant costing techniques. The following information is relevant to the contract:

Materials

Material A

A total of 7 500 kgs of Material A would be required. There are currently 500 kgs of Material A in inventory, which cost R15 per kg. Material A is in regular use by ABC and has a current purchase price of R20 per kg. The resale value of the material in inventory is currently R13 per kg.

Material B

A total of 5 000 kgs of Material B would be required. There are currently 2 000 kgs of Material B in inventory (which originally cost R32 per kg) because of a failed venture five months ago. This stock is in good condition and will be returned to the supplier for R16 per kg as ABC will not engage in this type of venture again. Material B can currently be purchased in the market at a price of R35 per kg.

Component C

A total of 8 000 units of Component C would be required. This could be purchased externally from a supplier at the cost of R15 per unit. Alternatively, ABC could convert one of the components it currently manufactures, Component Z. The variable cost of Component Z is R7. ABC adds an additional R5 to cover apportioned fixed costs and finally sells Component Z at R16 per unit.

ABC can produce an additional 5 000 units of Component Z without affecting sales to external customers.

Labour

Direct labour

A total of 2 000 direct labour hours would be required. All direct labour is paid on an hourly basis. The relevant labourers are semi-skilled and paid R25 per hour. However, semi-skilled labour at ABC are already at maximum capacity and cannot be diverted from existing production due to contractual obligations.

You have identified that the following labour options are available:

1. Unskilled labour may be hired at a cost of R20 per hour for the 2 000 hours. These labourers will need additional training at a total cost of R20 000.

2. Arrange for subcontract workers to undertake the 2 000 hours of the work. These workers would be paid at a rate of R23 per hour with the subcontractor requiring a fee of 20% of the total wage paid.

Supervision

An existing manager has agreed to supervise the contract. His annual salary is R500 000, and this contract will last two months. The manager has sufficient capacity to perform this additional supervision and will be awarded a bonus of R5 000 for the extra work. In addition, the company will send the manager to China to undergo further training at the cost of R20 000.

Overheads

Specialist machinery and variable overheads

The opportunity with China Electronics will require a specialised machine. The machine could be hired for R15 000 for the duration of the contract, or the machine could be purchased for R50 000 and sold at the end of the contract for R30 000. Alternatively, if the machine is purchased, at the end of the contract it could be modified at the cost of R2 000. It could then be used on other contracts instead of buying another essential machine that would cost R40 000.

The machine will be operated for a total of 1 500 machine hours. The variable operating costs related to the machine are R10 per hour.

Fixed overheads

ABC absorbs general factory overheads at a rate of R15 per labour hour. Of this, R5 relates to depreciation.

Research and development

A total of 20 hours of research and development, costing R30 000, are required to ensure the adequacy of the final product. Five hours have already been worked in this regard, and the remaining 15 hours will only be completed if the contract is accepted.

REQUIRED

Ignoring the revision to product costing, determine the minimum quote for the contract with China Electronics.

You are also required to explain why any values you have excluded are not relevant.

ROUND ALL ANSWERS TO TWO (2) DECIMAL PLACES.

		R
Material A		Answer
	Workings and comments for material A: Answer Answer Answer
Material B		Answer
	Workings and comments for material B: Answer Answer Answer
Component C	Enter the best of the options below here for component C	Answer
	Option 1 cost: RAnswer
	Workings and comments for Option 1: Answer Answer Answer
	Option 2 cost: RAnswer
	Workings and comments for Option 2: Answer Answer Answer
	Option 3 cost: RAnswer
	Workings and comments for Option 3: Answer Answer Answer
Labour	Enter the best of the options below here for labour	Answer
	Option 1 cost: RAnswer
	Workings and comments for Option 1: Answer Answer Answer
	Option 2 cost: RAnswer
	Workings and comments for Option 2: Answer Answer Answer
	Option 3 cost: RAnswer
	Workings and comments for Option 3: Answer Answer Answer
Supervisor salary		Answer
	Workings and comments for supervisor salary: Answer
Supervisor bonus		Answer
	Workings and comments for supervisor bonus: Answer
Additional training		Answer
	Workings and comments for additional training: Answer
Specialist machinery	Enter the best of the options below here for specialist machinery	Answer
	Option 1 cost: RAnswer
	Workings and comments for Option 1: Answer Answer Answer
	Option 2 cost: RAnswer
	Workings and comments for Option 2: Answer Answer Answer
	Option 3 cost: RAnswer
	Workings and comments for Option 3: Answer Answer Answer
Variable overheads		Answer
	Workings and comments for variable overheads: Answer
Fixed overheads		Answer
	Workings and comments for fixed overheads: Answer
Research and development		Answer
	Workings and comments for research and development: Answer Answer Answer
Minimum tender price		Answer