Question
The management of ADVAN Enterprise has been deliberating whether or not to accept a one-off contract. The customer is offering a price of $9,500,000 to
The management of ADVAN Enterprise has been deliberating whether or not to accept a one-off contract. The customer is offering a price of $9,500,000 to provide landscaping services. The landscaper has indicated to management that the total cost will include, direct material, direct labour, direct expenses and suitable overheads. Managements policy is to apply a mark-up of 35% to all contracts. The following information is relevant to the special contract: The contract requires 40,000 kilograms of grade A topsoil: Currently the company has 16,000 kilograms of Grade A soil in stock from a prior contract. The soil cost $95 per kilogram when it was bought last year. A customer in St. Ann has offered to buy the current stock of Grade A soil for $100 per kilogram, provided it is transported to the customer. The cost of transporting it to Moneague is $16,000, however, ADVAN decided to use the material in the contract. The current purchase price per kilogram of the Grade A soil is $90. The contract also requires 1,600 exotic plants. The current unit price is $700, but 650 plants are currently in the nursery. The plants were bought last year at $650 per kilogram. However, it was determined that these plants were infected by a fungus and would require treatment at a cost of $55,000. Management was offered $500 per plant, as is, without the fungal treatment however a decision was made to use it in the contract. The one-off contract also requires 80 bags of fertilizer. ADVAN bought 65 bags four months ago to use on another project at a price of $5,500 per bag, that project was cancelled. The bags of fertilizer can be sold to a competitor for $5,800. The current purchase price per bag is $6,200. Skilled workers are required. It was advised that 185 hours are required at $560 per hour. These workers will be employed specifically for this contract. Unskilled workers are currently paid a rate of $380 per hour. ADVAN employs 10 unskilled workers to work 8 hours per day for five days per week. The contract is expected to last seven weeks. However, they are currently employed by the company where they are earning a contribution for the company at $290 per hour. For this project the company will need 4 of the unskilled workers. The entity has fixed cost of $950,000 that is to be charged to the contract. Further analysis indicated that 60% of the fixed cost will continue whether or not the contract is accepted. Required: Advise management on the feasibility of the contract after preparing a cost and profit statement based on the above. (20 marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started