QUESTION THREE Knowing that you are studying management accounting, a friend who manages a small business has sought some costing advice about Project X-a one-off order that he intends to tender for. The costs associated with the Project X are as follows: 16,000 32,000 24,000 8,000 48.000 128,000 Material A Material B Direct labour Supervision Overheads You ascertain the following information: i. Material A is in stock and the above was the cost. There is now no other use for Material A, other than Project X and it would cost 7,000 to dispose of. ii. Material B would have to be ordered at the cost shown above. iii. Direct labour costs of 24,000 relates to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at cost of 28,000 iv. Supervision costs have been charged to the project on the basis of 33% of labour costs and will be carried out by existing staff within their normal duties. v. Overheads have been charged to the project at the rate of 200% on direct labour. vi. The company is currently operating at a point above break-even. vii. The project will need the utilisation of machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of 40,000 and then disposed of for 21,000 at the end of the project. The friend tells you that the customer is prepared to pay up to a maximum of 90,000 for the project and a competitor is prepared to accept the order at that price. He also informs you the minimum that he can charge is 140,000 as the above costs show 128,000 and this does not take into consideration the cost of the machine and profit to be taken on the project. REQUIRED: (a) Based on the information provided, advice your friend as to whether or not he should tender for Project X. Explain your treatment of each item that comprises your financial analysis. State any assumptions that you made. (25 Marks) (b) Outline three non-financial factors that your friend should also consider before making their final decision as to whether or not tender for this project. (15 Marks) (c) Outline what is meant by a 'sunk cost' and explain why firms need to consider this type of cost when making decisions. Provide two examples of 'sunk costs' to supplement your answer. (10 Marks) (TOTAL: 50 MARKS) Page 4 of 6 QUESTION THREE Knowing that you are studying management accounting, a friend who manages a small business has sought some costing advice about Project X-a one-off order that he intends to tender for. The costs associated with the Project X are as follows: 16,000 32,000 24,000 8,000 48.000 128,000 Material A Material B Direct labour Supervision Overheads You ascertain the following information: i. Material A is in stock and the above was the cost. There is now no other use for Material A, other than Project X and it would cost 7,000 to dispose of. ii. Material B would have to be ordered at the cost shown above. iii. Direct labour costs of 24,000 relates to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at cost of 28,000 iv. Supervision costs have been charged to the project on the basis of 33% of labour costs and will be carried out by existing staff within their normal duties. v. Overheads have been charged to the project at the rate of 200% on direct labour. vi. The company is currently operating at a point above break-even. vii. The project will need the utilisation of machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of 40,000 and then disposed of for 21,000 at the end of the project. The friend tells you that the customer is prepared to pay up to a maximum of 90,000 for the project and a competitor is prepared to accept the order at that price. He also informs you the minimum that he can charge is 140,000 as the above costs show 128,000 and this does not take into consideration the cost of the machine and profit to be taken on the project. REQUIRED: (a) Based on the information provided, advice your friend as to whether or not he should tender for Project X. Explain your treatment of each item that comprises your financial analysis. State any assumptions that you made. (25 Marks) (b) Outline three non-financial factors that your friend should also consider before making their final decision as to whether or not tender for this project. (15 Marks) (c) Outline what is meant by a 'sunk cost' and explain why firms need to consider this type of cost when making decisions. Provide two examples of 'sunk costs' to supplement your answer. (10 Marks) (TOTAL: 50 MARKS) Page 4 of 6
