Superwheels manufactures electronic components used in motor car assembly. The company has just received a special order from the Bumper Cars Group, to supply 520 NOS components over the next 12 months. As Superwheels is currently working below full capacity, the company is seriously considering this order.

You are the Management Accountant of Superwheels. While you were on leave, the Financial Manager asked your inexperienced assistant to evaluate the Bumper Cars order. Your assistant has come up with the following cost calculation for the Bumper Cars NOS component:

Manufacturing overheads:

Variable: 11 hours at R 19 per hour Fixed: 11 hours at R 42 per hour

Material:

Crusoe: 3 kilograms at R 54 per kg Delta: 2 kilograms at R 40 per kg Gamma: Component cost Gamma: Buyers time

Labour:

Skilled 5 hours at R 50 per hour Semi-skilled 5 hours at R 20 per hour Total Cost

R s

209 462

162 80 120 25

250 100 1 408

As Bumper Cars have offered a price of R 1 200 per component, your assistant has advised the Financial Manager to reject the order. Before doing so, the Financial Manager has asked you to go over your assistants calculations to ensure that there are no errors.

You obtain the following additional information on which your assistant based his calculations:

(1) Material Crusoe is in continuous use by the company. 1 400 kilograms are currently in stock, at a book value of R 54 per kilogram. If any of this stock is used for the Bumper Cars order, it will have to be replaced at a cost of R 58 per kilogram.

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(2) 1 200 kilograms of material Delta are in stock. The original cost of this material was R 40 per kilogram, but it is no longer in use by the company. If not used for the Bumper Cars order, it will be scrapped. This has no resale value.

(3) Part Gamma can be bought for R 120 each. However, the part is difficult to source and will take up 5% of the existing buyers time during the year. The buyers fixed salary and benefits package is R 240 000 per annum.

(4) Each NOS component will require 11 hours of direct labour: 5.5 hours of skilled labour, and 5.5 hours of semi-skilled labour. A skilled worker on the companys permanent staff (currently earning R50 per hour) will be moved from his current job to work on the NOS order. He will have to be replaced by a temporary worker, who will be paid R 45 per hour.

(5) A semi-skilled worker will be hired for the NOS order at R 25 per hour.

(6) Superwheels applies Fixed Manufacturing Overheads to production on the basis of direct labour hours. The hourly fixed overhead rate is based on budgeted fixed manufacturing overhead costs and budgeted direct labour hours. Based on the budget for the next 12 months, this rate is R 45 per direct labour hour. (The budget was finalised before the Bumper Cars enquiry was received). No additional fixed manufacturing overheads will be incurred as a result of the project.

1.1. Using Relevant Cost principles, prepare a numerical analysis which will allow you to make a proper decision regarding the Bumper Cars order. Address, with reason, items not included in your calculation. (18)