QUESTION ONE

$[20]$

Valley Pines is the manufacturing company has been asked to provide a quotation for a contract for a new customer and is aware that this could lead to further orders. Consequently, Valley Pines will produce the quotation by using relevant costing instead of its usual method of full costing plus pricing.

The following information has been obtained in relation to the contract:

Material D

$40$ tons of material $D$ would be required. This material is a regular use by Valley Pines and has a current purchase price of R$38$ per ton. Currently, there are $5$ tons on inventory which cost R$35$ per ton. The resale value of the material in inventory is R$24$ per ton.

Components

$4000$ would be required. These could be bought externally at $R15$ each or alternatively they could be supplied by Peak Tops, another a sister company to Valley Pines. The variable cost of the component if it were manufactured by Peak Tops would be R$8$ per unit, and Peak Tops adds $30\%$ to its variable to contribute to its fixed costs and a further $20\%$ to these total costs to set its internal price. Peak Tops has sufficient capacity to produce $2500$ components without affecting its ability to satisfy its own external customers. However, to make the extra $1500$ components required by Valley Pines, Peak Tops would have to forgo other external sales of R$50000$ which have a contribution to sales ratio of $40\%.$

Labour hours

$850$ direct labour hours would be required. All direct labour within Valley Pines is on an hourly basis with no guaranteed wage agreement. The grade of labour required is currently paid R$10$ per hour, but department $W$ is already working at $100\%$ capacity. Possible ways of overcoming problem are:

Use workers in department Z because it has sufficient capacity. These workers are paid R$15$ per hour.

Arrange for subcontract workers to undertake some of the other work performed at department W$.$ The subcontract workers would cost R$13$ per hour.

Specialist machine

The contract will require a specialist machine. The machine could be hired for R$15000$ or could be bought for R$50000.$ At the end of the contract if the machine was bought, it could be sold for R$30000.$ Alternatively, it could be modified at a cost of R$5000$ and used to other contracts instead of buying another essential machine that would cost R$4500.$ The operating costs of the machine are payable by Valley Pines whether it hires or buys the machine. These costs would total to R$12000$ in respect of the new contract.

Supervisor

The contract would be supervised by an existing manager who is paid an annual salary of R$50000$ and has sufficient capacity to carry out this supervision. The manager would receive a bonus of R$500$ for the additional work.

Development time

$15$ hours of development time at a cost of R$3000$ has already been worked in determining the resource requirements for the contract.

Fixed overhead absorption rate

Valley Pines uses an absorption rate of R$20$ per direct labour hour to recover its general fixed overhead costs. This includes R$5$ per hour for depreciation.

Required:

Calculate the relevant cost of the contract to Valley Pines. You must present your answer in a schedule that clearly shows the relevant cost value for each of the items identified above. You should also explain each relevant cost value you have included in your schedule and why any values you have excluded are not relevant.

$(20)$