T Mi COL Unf The s ase c) Question Two a) Explain the significance of using relevant costing techniques in decision making. b) Define the following costs and give an example for each: 1. sunk costs 2. variable costs 3. opportunity costs (6 marks) (6 marks) Thomas Ltd produces and sells clocks. A customer from the United States has requested a quotation from Thomas Ltd to supply 1,500 specialist grandfather clocks, and is prepared to pay 550 per clock. The following information relates to Thomas Ltd's costing of the contract: Materials Direct labour Indirect materials General overheads Supervising costs Managers' salaries Specialist wood 200,000 Paint and varnish (2,000 litres @ 65 per litre) 130,000 Assembly/finishing and packing 50,000 150,000 300,000 25,000 30,000 The following information is also relevant: 1. The specialist wood of 200,000 is the original purchase cost. This material was bought some years ago and is no longer used by the company for its usual production. If not used for this contract, it can be sold for 25,000. 2. The paint and varnish is currently used by the company for all its products. The historic cost is 65 per litre; however current supplies can be purchased for 62.50 per litre. 3. All direct labour has spare capacity, which is sufficient for this contract and all labour would continue working. 4. The indirect materials of 150,000 include 5,000, which are no longer required for other production. If not required for this 'grandfather contract', this 5,000 worth of materials could be sold for 3,000. 5. Managers are expected to take responsibility for all contracts. 6. Although two supervisors have sufficient time to supervise this contract, a goodwill bonus of 1,000 per supervisor is anticipated. 7. It is estimated that 25% of general overheads are incurred as a direct result of accepting this contract. c) Using your own calculations, determine whether the contract should proceed. You should explain all costs. (13 marks)