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Task 1b. Costing and Pricing Decisions:

Kim Cuong Ltd has recently been asked to tender for a contract to install centralheating systems in the textile industry. The following details relate to the

proposed contract:

a. Materials:(i) $22,500 of materials would need to be purchased (mua) ; fixed(ii) $14,000 of materials would need to be transferred from anothercontract (these materials would need to be replaced);(iii) Some obsolete (qu hn) stock would be used. The stock had originally cost$20,000. Its current disposable (c th chuyn nhng) value is $5,000.

b. The contract would involve labour costs of $100,000, of which $55,000 (fixed)would be incurred regardless of whether the contract was undertaken. (fixed cost)

c. The production manager will have to work several evenings a weekduring the progress of the contract. He is paid a salary of $45,000 peryear(fixed) , and on successful completion of the contract he would receive a

bonus of $7,250.

d. Additional administrative expenses incurred in undertakings thecontract are estimated to be $4,325.

e. The company absorbs its fixed overheads at a rate of 12% permachine hour. The contract will require 4,000 machine hours.

Tasks: Calculate unit costs and make pricing decisions using relevant informationgiven in the scenario (3 b)Hints:

.. Calculate the minimum contract price that would be acceptable toKim Cuong Ltd.

7/28/2019 MFRD Assgn2 Task 1bb

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Solutiona. Materials:

i. $22,500 of materials would need to be purchased. This is not yet owned. It wouldhave to be bought. This is a fixed cost so it is irrelevant to a decision.

ii. These materials will be transferred from another contract and they need to be

replaced. Relevant cost is therefore at the replacement cost of $14,000.iii. For some obsolete stock, they had the cost that is fixed at $20,000. And in the

future, they can be sold at $5,000. The relevant cost here is an opportunity cost ofsales revenue forgone at $5,000.

b. For labour cost, $55,000 in the total $100,000 is fixed even though the contractwas undertaken. The relevant cost is therefore ($100,000 - $55,000) $45,000.c. The production manager is paid a salary of $45,000 per year (fixed cost). A bonusof $7,250 is relevant cost in the future of the contract is successful.d. In the future, the relevant cost of administration expenses is $4,325.e. The company absorbs its fixed overheads at a rate of 12% per machine hour. Thevariable cost is therefore 4,000 machine hours of 88% per machine hour.

Summary of relevant cost

$Materials ($14,000 + $5,000) 19000

Labour cost($100,000 -$55,000) 45000

Cost for the production manager 7250Cost of administration expenses 4325

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