Decision Making Assignment

Question #1
CC Co is in the process of preparing a quotation for a special job for a customer. The job will require 510
units of material S. 420 units are already in stock at a book value of $50 per unit. The net realisable value
per unit is $30. The replacement price per unit is $72. The material is in stock as a result of previous over
buying. The units in stock could be used on another job as a substitute for 750 units of material V, which
are about to be purchased at a price of $25 per unit.
Required:
Calculate the relevant cost of material for this special job

Question #2

Jimco makes and sells a single product, Product P. It is currently producing 112,000 units per month, and
is operating at 80% of full capacity. Total monthly costs at the current level of capacity are Rs.611,000.
At 100% capacity, total monthly costs would be Rs.695,000. Fixed costs would be the same per month at
all levels of capacity between 80% and 100%.

At the normal selling price for Product P, the contribution/sales ratio is 60%.
A new customer has offered to buy 25,000 units of Product P each month, at 20% below the normal
selling price. Jimco estimates that for every five units that it sells to this customer, it will lose one unit of
its current monthly sales to other customers.

Required:

Calculate the variable cost per unit of Product P and total fixed costs per month.

Calculate the current normal sales price per unit, and the contribution per unit at this price.

Calculate the effect on total profit each month of accepting the new customer’s offer, and selling 25,000
units per month to this customer. Recommend whether the customer’s offer should be accepted.

Question #3

A company is considering whether to agree to do a job for a customer. It has sufficient spare capacity to
take on this job.
To do the job, three different direct materials will be required, Material X, Material Y and Material Z.
Data relating to these materials is as follows:

Material Quantity Stock held Original cost Current Current

needed purchase cost disposal value
X 800 200 20 23 22
Y 600 400 15 19 12
Z 500 300 30 40 20
Material X is regularly used by the company for other work. Material Y is no longer in regular use, and
the units currently held as inventory have no alternative use. Material Z is also no longer in regular use,
but if the existing inventory of the material is not used for this job, they can be used as a substitute
material on a different job, where the contribution would be Rs.25 per unit of Material Z used

Required:

Calculate the total relevant costs of the materials for this job for the customer

Question #4

JD is a small specialist manufacturer of electronic components and much of its output is used by the
makers of aircraft. One of the small number of aircraft manufacturers has offered a contract to Company
JD for the supply of 400 identical components over the next twelve months.

The data relating to the production of each component is as follows:

Material requirements:
3 kilograms material M1: see note 1 below
2 kilograms material P2: see note 2 below
1 Part No. 678: see note 3 below

Note 1
Material M1 is in continuous use by the company. 1,000 kilograms are currently held in stock at a
carrying amount of Rs.4.70 per kilogram but it is known that future purchases will cost Rs.5.50 per
kilogram.

Note 2
1,200 kilograms of material P2 are held in inventory. The original cost of the material was Rs.4.30 per
kilogram but as the material has not been required for the last two years it has been written down to
Rs.1.50 per kilogram (scrap value). The only foreseeable alternative use is as a substitute for material P4
(in current use) but this would involve further processing costs of Rs.1.60 per kilogram. The current cost
of material P4 is Rs.3.60 per kilogram.

Note 3
It is estimated that the Part No. 678 could be bought for Rs.50 each.

Labour requirements
Each component would require five hours of skilled labour and five hours of semi-skilled. An employee
possessing the necessary skills is available and is currently paid Rs.5 per hour. A replacement would,
however, have to be obtained at a rate of Rs.4 per hour for the work that would otherwise be done by
the skilled employee. The current rate for semi-skilled work is Rs.3 per hour and an additional employee
could be appointed for this work.

Overhead
JD absorbs overhead by a machine hour rate, currently Rs.20 per hour of which Rs.7 is for
variable overhead and Rs.13 for fixed overhead. If this contract is undertaken it is estimated that
fixed costs will increase for the duration of the contract by Rs.3,200. Spare machine capacity is
available and each component would require four machine hours.
A price of Rs.145 per component has been suggested by the large aircraft manufacturer.

Required :
State whether or not the contract should be accepted