Tutorial 2 - Solution

Question 1

Relevant cost of Ammonia

• As ammonia is regularly used in the business, its relevant cost will be the current price.
• Unit cost last month = R4 500/ 1 800kgs = R2.50 per kg. 
• The current price after an 8% price hike = R2.50 x 1.08 = R2.70 per kg. 
• The relevant cost ammonia for the special order = 3 500kgs x R2.70 = R9 450. 

The relevant cost of phosphoric acid

• Phosphoric acid is not regularly used in the business, the current inventories need not to be
replaced if used or sold. The relevant cost of phosphoric acid is therefore its net realisable
value if it were sold. 
• The relevant cost phosphoric acid for the special order = 3 000kgs x (R2.75 – R0.50) = R6 750.
(Opportunity cost)

Skilled labour

• As skilled labour is in short supply, its relevant cost will be actual cost of labour hours
required for the special order plus the opportunity cost of labour diverted from the
production of ammonium nitrate.
• The actual cost of labour = (900/60) 15 Hours x R180 = R2 700. 
• The opportunity cost of labour can be calculated in two ways:

Method 1

• No. of hours required for a 50kg bag of ammonium nitrate = R36.00/R180 = 0.20 hours 
• The contribution per 50kgs of ammonium nitrate = (R335 – R88 – R36 – R40) = R171
• The contribution per skilled labour hour (extra price of skilled labour) = R171/0.2 = R855
(contribution lost)
• Opportunity cost of skilled labour for the special order = (900/60)15 hours x R855 = R12
825. 

Or

Method 2:

• Skilled labour minutes required = 900 minutes

• Skilled labour minutes required for a 50kg bag of ammonium = (R36.00/R180) x 60minutes =
12 minutes. 
• Number of ammonium nitrate bags sacrificed = 900/12 = 75 bags
• Contribution per bag of ammonium nitrate = R171
• The total contribution sacrificed (opportunity cost) = 75 bags x R171 = R12 825.
• The relevant cost of skilled labour is therefore = R2 700 + R12 825 = R15 525
• The minimum price for the special order = R9 450 + R6 750 + R15 525 + R2 875 = R34 600
Question 2 - Suggested Solution:

a) Relevant Cost Schedule

R
Petrol 1 000,00
Tollgate 100,00
EXTRA DIZA (R4000 -R500) 3 500,00
Chocolate, roses and wine 1 650,00
Extra Insurance 300,00
Accommodation and entertainment 3 000,00
Opportunity cost 150,00
Total Valentine Cost 9 700,00

Comments:

 Installment : R10 000 - Irrelevant (Fixed cost: Committed cost)

 Car Insurance: R3 000 – Irrelevant ( Fixed cost :Committed cost)
 License disk: R200 – Irrelevant (Committed cost : Irrelevant)
 Petrol to Mpumalanga : R1000 (Relevant)
 Tollgate: R100 - : (Relevant)
 Car cost (2 years back when bought) :R500 000 (Sunk cost - Irrelevant)
 The car depreciation amount for the month of February (2 weeks) ;R15 000 (Irrelevant – Non
cash flow item)
 DIZA Money of R500 : Irrelevant (Committed cost)
 Extra Cash : R4000 – Only R3500 is relevant since the R500 is committed cost
 Chocolate, Roses and Wine of R1650 – Relevant
 Extra insurance 10% of R300 ( Incremental cost - Relevant)
 Accommodation and entertainment at MP of R3000 – Relevant
 Opportunity cost :
 Revenue (R10*65 students) R650
 Variable cost R500
 Contribution lost R150

b) Non-financial factors (Discuss them):

 More love and affection from GF
 Trust from GF
 Mpumalanga is loved by tourist (geographical area)
 Issue of trust from colleagues (Dishonesty)
 The road used was high accidental risk zone
 Other valid points

c) Ethics
 Code of professional conduct being breached
 Dishonesty and trust issues
 Quote the relevant code issue on the auditing CPC handbook
 Any other valid points

Question 3 - Solution
 R
Material A 1 000 kgs @ R2 – R300 1 700
(Note 1) 1 000 kgs @ R10 10 000
———
11 700
Material B (note 2) 1 000 kgs @R15 15 000
Material C (note 3) 500 kgs – opportunity cost 8 000
Material D (note 4) 50 litres @ R50 (2 500)
Skilled labour (note 5) 1 000 hrs @ R25 25 000
Semiskilled labour (note 6) 500 hrs @ R22.50 11 250
Unskilled labour (note 7) 500 hrs @ R12 (opportunity cost) 6 000
———
Minimum tender price = total of relevant cash flows 74 450
———

NOTES

1. There are 1,000 kgs in stock and these will not be replaced. These would otherwise be sold
at a net gain of R1 700. This gain is therefore foregone as a result of using this material in the
contract. The other 1,000 kgs are out of stock and therefore the relevant cost is the current
purchase price of R10 per kg.
2. The material is in stock but will be replaced and therefore the relevant cost is the current
purchase price of R15 per kg.
3. The material is in stock and there are two options if this material is not used for the contract:

Option 1 – Sell it for R6 000.

Option 2 – Use it as a substitute and save R8 000.
Option 2 is preferable. This is therefore the opportunity cost of using it in the contract.

4. The material is in stock and will not be replaced. The cost of disposing of 50 litres will be
saved (@ R50/litre, i.e. R2 500). Saving this cost is a relevant benefit.
5. The incremental cost of paying for the labour needed.
6. 1 500 spare hours have already been paid for as the workforce are on annual contracts. The
additional cash flow is therefore the extra 500 hours that are needed at time-and-a-half.
7. For each hour diverted from their normal jobs contribution of R2 will be foregone. This
together with the cost of paying the workers to do the project amounts to a relevant cost of
R12 per kg. They would not be hired at R20 per hour as this is more expensive.
8. Fixed overheads can be ignored as they are not incremental.
9. Costs of preparing the tender are all sunk costs and hence must be ignored.
10. Profit element should be ignored since a minimum contract price is being calculated.