Task 1b.

Costing and Pricing Decisions: Kim Cuong Ltd has recently been asked to tender for a contract to install central heating systems in the textile industry. The following details relate to the proposed contract: a. Materials: (i) $22,500 of materials would need to be purchased (mua) ; fixed (ii) $14,000 of materials would need to be transferred from another contract (these materials would need to be replaced); (iii) Some obsolete (qu hn) stock would be used. The stock had originally cost $20,000. Its current disposable (c th chuyn nhng) value is $5,000. b. The contract would involve labour costs of $100,000, of which $55,000 (fixed) would be incurred regardless of whether the contract was undertaken. (fixed cost) c. The production manager will have to work several evenings a week during the progress of the contract. He is paid a salary of $45,000 per year (fixed) , and on successful completion of the contract he would receive a bonus of $7,250. d. Additional administrative expenses incurred in undertakings the contract are estimated to be $4,325. e. The company absorbs its fixed overheads at a rate of 12% per machine hour. The contract will require 4,000 machine hours. Tasks: Calculate unit costs and make pricing decisions using relevant information given in the scenario (3 b) Hints: .. Calculate the minimum contract price that would be acceptable to Kim Cuong Ltd.

Solution a. Materials: i. $22,500 of materials would need to be purchased. This is not yet owned. It would have to be bought. This is a fixed cost so it is irrelevant to a decision. ii. These materials will be transferred from another contract and they need to be replaced. Relevant cost is therefore at the replacement cost of $14,000. iii. For some obsolete stock, they had the cost that is fixed at $20,000. And in the future, they can be sold at $5,000. The relevant cost here is an opportunity cost of sales revenue forgone at $5,000. b. For labour cost, $55,000 in the total $100,000 is fixed even though the contract was undertaken. The relevant cost is therefore ($100,000 - $55,000) $45,000. c. The production manager is paid a salary of $45,000 per year (fixed cost). A bonus of $7,250 is relevant cost in the future of the contract is successful. d. In the future, the relevant cost of administration expenses is $4,325. e. The company absorbs its fixed overheads at a rate of 12% per machine hour. The variable cost is therefore 4,000 machine hours of 88% per machine hour. Summary of relevant cost $ 19000 45000 7250 4325 75575

Materials Labour cost Cost for the production manager Cost of administration expenses

($14,000 + $5,000) ($100,000 $55,000)