Topic: Performance management

Question 1

Connect Co. is a company that specializes in the provision of touch-screen office telephone systems for commercial clients. It offers two types of services for their customers:

-Initial installation of the touch-screen office telephone systems in business premises.

-Annual repairs and maintenance contract that is renewable each year.

The company has been approached by their existing customer, Yohan Ltd from Penang to install the touch-screen office telephone system in their first branch-office in Kuala Lumpur (KL). Connect Co. has been doing business with Yohan Ltd for the past three years and is confident that good business opportunities will arise in future by servicing them as Yohan Ltd is highly expected to expand their business into various locations throughout Malaysia. Thus, Connect Ltd is keen to quote a competitive selling price for their special order. The following information is given to you to assist in making the right decision on whether to accept or reject this special order from Yohan Ltd.

1. Connect Co's Marketing Manager had visited Yohan's Penang office two months ago to give the person-in-charge (Ms. Betty) a hands-on demonstration of the telephone system together with a complimentary Buffet lunch voucher at Concorde Hotel. The total cost of this visit was $1,200. Their meeting was very fruitful and Ms. Betty wants to meet-up again in their KL office in a month's time. This forthcoming meeting is estimated to cost Connect Co. another $1,200 in terms of travelling ($300), accommodation ($500) and lunch ($400).

2. The installation work is expected to be completed within 5 working days (1 week) and would require two engineers, each of whom is paid an annual salary of $72,000. One of the engineers (Mr. Alex) has spare capacity to complete Yohan Ltd's job, but the second engineer (Ms. Rose) that will be required, will be taken out from the existing work at POT Ltd in order to complete Yohan Ltd's order. The current work at POT Ltd generates a contribution of $30 per engineering hour. There is no other engineer currently available to continue with the work at POT Ltd if Ms. Rose is taken off from here. This would mean that Connect Co would not be able to meet its contractual deadline of completion for the work at POT Ltd by 5 days. As a result of this, Connect Co. would have to pay POT Ltd a late penalty fee of $500 per day delayed. Since there is no other work yet to be scheduled for these two engineers in one week's time, it will not be a problem for them to complete the work at POT Ltd in one week's time.

3. The completed installation work at Yohan Ltd's KL office would have to be approved by a certified site-inspector who would require two official visits. He is an independent person (Mr. Arun) who is not employed by Connect and charges Yohan Ltd directly for all inspection work carried during each visit. The cost of each visit is $600. However, before the external site-inspector come, one of Connect Co's external site-inspector (Mr. Kumar) will do final inspection that will cost Connect Co. $500 in total.

4. Connect's systems trainer would need to spend eight hours per day for three days at Yohan Ltd's premises to deliver systems training to their staff. This trainer is paid a monthly salary of $4,500, but receives an incentive of $120 per hour for each day of training delivered at any client's place.

5. After installation, 100 telephone handsets would need to be supplied to Yohan Ltd. The current market price of the handset is $150.00 each. Connect already has 50 handsets in inventory which were bought at a price of $100.00 per set. The handsets are the most popular model on the market and frequently requested by Connect's customers.

6. A computerized telephone control system called 'Control-Y' would be used. The current market price of Control-Y is $15,000. Connect has an older version of the same system, 'Control-X' in inventory, which could be modified at a net cost of $4,600. Connect Co paid $12,000 for Control-X when it was ordered by mistake two months ago and has no other use. The current market price of Control-X is $12,500, but if Connect Co were to sell this unit in inventory, it would be deemed to be a 'used product' and therefore only worth $6,500.

7. 1,500 meters of cable would be required to wire up the new telephone system at Yohan Ltd. The cable is frequently used by Connect Co and it has 500 meters in inventory, which was bought at $5.00 per meter last month. The current market price of the cable is $7.50 per meter.

Note: Assume that there are four weeks in each month and that the standard working hours is eight hours per day in a five working days per week.

Required:

a) Explain the terms relevant and irrelevant costs and how this will be used for short term decision making purposes. (20 Marks)

b) Using relevant costing principle, ascertain the minimum price that Connect Co. could charge Yohan Ltd for the special order. You are also required to give a detailed explanation on how each of the relevant costs were arrived at and why the costs mentioned in the notes above were included or excluded from your calculations. Prepare you answer in a statement format. (30 Marks)

Question2

Discuss the underlying principles in Life Cycle Costing (LCC) technique and what are the challenges faced by companies in under-taking this technique. Provide appropriate examples and/or illustration. (30 marks)