Management Accounting

Quiz-6

Name…………………………………. Roll No…………… Section…………………

Time allowed: 35 Minutes Maximum Marks: 20

Note: For step marks, please solve the problem step-wise:

JB Limited is a small specialist manufacturer of electronic components and much of its
output is used by the makers of aircraft for both civil and military purposes. One of the
aircraft manufacturers has offered a contract to JB Limited for the supply, over the next
12 months, of 400 identical components.

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

(i) Material requirements:

3kg material M1 – see note 1 below
2kg 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. 1000 kg are currently held in
stock at a book value of Rs 4.70 per kg but it is known that future purchases will cost Rs
5.50 per kg, as price has already increased in the market.

Note 2. 1200kg of material P2 are held in stock. The original cost of this material was Rs
4.30 per kg but as the material has not been required for the last two years it has been
written down to Rs1.50 per kg 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 Rs1.60 per kg. The current cost of material P4 is Rs3.60 per kg.

Note 3. It is estimated that Part No. 678 could be bought for Rs50 each.

(ii) Labour requirements:

Each component would require five hours of skilled labour and five hours of semiskilled.
An employee possessing the necessary skills is available and is currently paid Rs12 per
hour. However, exiting skilled labour is currently engaged in ongoing production
activities. Replacement would have to be obtained at a rate of Rs 13 per hour. The current
rate for semi-skilled work is Rs10 per hour and an additional employee could be
appointed for this work.

(iii) Overhead:
JB Limited absorbs overhead by a machine hour rate, currently Rs 20 per hour of which
Rs7 per hour is for variable overhead and Rs13 per hour is for fixed overhead. If this
contract is undertaken it is estimated that fixed costs will increase for the duration of the
contract by Rs3200. Spare machine capacity is available and each component would
require four machine hours.

A price of Rs250 per component has been suggested by the large company which makes
aircraft.

Required:
 i. State whether or not the contract should be accepted and support your conclusion
with appropriate figures for presentation to management. (15 marks)
ii. Comment briefly on three factors that management ought to consider and which
may influence their decision. (5 Marks)

Management Accounting
 Quiz-6
Name…………………………………. Roll No…………… Section…………………