1.

Maliaka Industries
A one year contract has been offered to Maliaka Industries which will utilize an existing machine
that is only suitable for such contract works. The machine cost Rs. 275,000 four years ago and has
been depreciated by Rs. 60,000 per year on a straight-line basis and thus has a book value of Rs.
35,000. The machine could now be sold for Rs. 47,500 or in one year’s time for Rs. 4,000.
Four types of materials would be required for the contract as follows:
Units Purchase Current
Current
Available Required price of buying
Material resale
in stocks for contract stocks price
price Rs.
Rs. Rs.
071 1,200 450 23.00 17.00 14.50
076 200 1,250 32.00 42.00 40.50
079 3,000 800 47.00 53.50 42.00
085 1,800 1,200 33.00 13.25 12.00

Materials 071 and 085 are in regular use within the firm. Material 076 could be sold if not used
for the contract and there are no other uses for 079, which has been deemed to be obsolete.
The labour requirements for the contract are:
For six Subsequent For six Subsequent
months six months months six months
Hours Required Normal wage rate in Rs.
Skilled 1,350 1,276 25.00 28.75
Semi-skilled 1,400 1,225 17.00 19.00
Unskilled 1,225 1,400 15.00 16.00
It is expected that there will be shortage of skilled labour in the first six months only. Therefore,
for the purposes of the contract skilled labour will have to be diverted from other work from
which a contribution of Rs. 7.50 per hour is earned, net of wage costs. The firm currently has a
surplus of semi-skilled labour paid at full rate but doing unskilled work. The labour concerned
could be transferred to provide sufficient labour for the contract and would be replaced by
unskilled labour.
Overheads are generally allocated in the firm at Rs. 18 per skilled labour hour which represents
Rs. 13 for fixed overheads and Rs. 5 for variable overheads.
Required:
You are required to determine the relevant cost of the contract and sales price of the contract
using the following assumptions:
• 10% contribution margin is earned on the relevant cost of the contract;
• Contribution margin over relevant cost is equal to 15% of selling price. (8-Marks)
2. Fazal Industries Limited
Fazal Industries Limited is currently negotiating a contract to supply its products to K-Mart, a large
chain of departmental stores. K-Mart finally offered to sign a one year contract at a lump sum
price of Rs. 19,000,000.
The Cost Accountant of Fazal Industries Limited believes that the offered price is too low.
However, the management has asked you to re-assess the situation. The cost accountant has
provided you the following information:

Statement of Estimated Costs (Project: K-Mart)

Notes Rupees

Material:
X (at historical cost) (i) 1,500,000
Y (at historical cost) (ii) 1,350,000
Z (iii) 2,250,000
Labour:
Skilled (iv) 4,050,000
Unskilled (v) 2,250,000
Supervisory (vi) 810,000
Overheads (vii) 8,500,000
Total cost 20,710,000

You have analysed the situation and gathered the following information:
(i) Material X is available in stock. It has not been used for a long time because a substitute
is currently available at 20% less than the cost of X.
(ii) Material Y was ordered for another contract but is no longer required. Its net realizable
value is Rs. 1,470,000.
(iii) Material Z is not in stock.
(iv) Skilled labour can work on other contracts which are presently operated by semi-skilled
labour who have been hired on temporary basis at a cost of Rs. 325,000 per month. The
company will need to give them a notice of 30 days before terminating their services.
(v) Unskilled labour will have to be hired for this contract.
(vi) Two new supervisors will be hired for this contract at Rs. 15,000 per month. The present
supervisors will remain employed whether the contract is accepted or not.
(vii) These include fixed overheads absorbed at the rate of 100% of skilled labour. Fixed
production overheads of Rs. 875,000 which would only be incurred if the contract is
accepted, have been included for determining the above fixed overhead absorption rate.
Required:
Prepare a revised statement of estimated costs using the opportunity cost approach, for the
management of Fazal Industries and state whether the contract should be accepted or not. (10-
Marks)