QUESTION TWO [30] CDF is the manufacturing company within the DF group, CDG 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, CDF 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 CDF and has a current purchase price of R38 per ton. Currently, there are 5 tons on inventory which cost R35 per ton. The resale value of the material in inventory is R24 per ton. Components 4000 would be required. These could be bought externally at R15 each or alternatively they could be supplied by RDF, another company within the CDF manufacturing group. The variable cost of the component if it were manufactured by RDF would be R8 per unit, and RDF adds 30% to its variable to contribute to its fixed costs and a further 20% to these total costs to set its internal price. RDF has sufficient capacity to produce 2500 components without affecting its ability to satisfy its own external customers. However, to make the ADVANCED DIPLOMA IN FINANCIAL MANAGEMENT ACADEMIC AND ASSESSMENT CALENDAR DISTANCE REGENT BUSINESS SCHOOL (RBS) JANUARY 2022 30 extra 1500 components required by CDF, RDF would have to forgo other external sales of R50 000 which have a contribution to sales ratio of 40%. Labour hours 850 direct labour hours would be required. All direct labour within CDF is on an hourly basis with no guaranteed wage agreement. The grade of labour required is currently paid R10 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 R15 per hour. Arrange for subcontract workers to undertake some of the other work performed at department W. The subcontract workers would cost R13 per hour. Specialist machine: The contract will require a specialist machine. The machine could be hired for R15000 or could be bought for R50 000. At the end of the contract if the machine was bought, it could be sold for R30 000. Alternatively, it could be modified at a cost of R5000 and used to other contracts instead of buying another essential machine that would cost R45 00. The operating costs of the machine are payable by CDF whether it hires or buys the machine. These costs would total to R12000 in respect of the new contract. Supervisor The contract would be supervised by an existing manager who is paid an annual salary of R50 000 and has sufficient capacity to carry out this supervision. The manager would receive a bonus of R500 for the additional work. Development time 15 hours of development time at a cost of R3000 has already been worked in determining the resource requirements for the contract. ADVANCED DIPLOMA IN FINANCIAL MANAGEMENT ACADEMIC AND ASSESSMENT CALENDAR DISTANCE REGENT BUSINESS SCHOOL (RBS) JANUARY 2022 31 Fixed overhead absorption rate CDF uses an absorption rate of R20 per direct labour hour to recover its general fixed overhead costs. This includes R5 per hour for depreciation. Required: 2. 1 Calculate the relevant cost of the contract to CDF. 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) 2. 2 Explain the relevant cost information that should be presented in price-setting firms for both short-term and long-term decisions.