Ennerdale Ltd has been asked to quote a price for a one-off contract. The company’s man- agement accountant has asked for your advice on the relevant costs for the contract. The following information is available:
The contract requires 3000 kg of material K, which is a material used regularly by the com- pany in other production. The company has 2000 kg of material K currently in stock which had been purchased last month for a total cost of £19 600. Since then the price per kilo- gram for material K has increased by 5%. The contract also requires 200 kg of material L. There are 250 kg of material L in stock which are not required for normal production. This material originally cost a total of £3125. If not used on this contract, the stock of material L would be sold for £11 per kg.
The contract requires 800 hours of skilled labour. Skilled labour is paid £9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P:
£ per unit
Selling price 100
Skilled labour 38
Other variable costs 22
1 Prepare calculations showing the total relevant costs for making a decision about the contract in respect of the following cost elements:
a materials K and L; and b skilled labour.
2 Explain how you would decide which overhead costs would be relevant in the financial appraisal of the contract.