Question 1
(25 marks)
Nangula Ltd makes three products, all of which use the same machine, which is available for
50 000 hours per period.
The standard costs of the product per unit are:
PRODUCT
Direct materials
Direct labour
Machinists (N$8/hour)
Assemblers (N$6/hour)
Total variable cost
Selling price per unit
Maximum demand (units)
A
N$
70
B
N$
40
C
N$
80
48
36
154
200
3 000
32
40
112
158
2 500
56
42
178
224
5 000
Fixed costs are N$300 000 per period
Required:
a) Calculate the deficiency in machine hours for the next period.
(5 marks)
b) Determine the production plan that will maximise Nangula Ltd’s profits for the next
period
(9 marks)
c) Calculate the profit that will result from your recommended production plan
(5 marks)
d) Nangula, who is the director of Nangula Ltd, has attended a workshop on cost
management. She has picked up some important classification of costs but does not
remember what they mean. You, as the management accountant for Nangula Ltd, explain
to Nangula the meaning of the following terms;
i)
Opportunity cost
ii)
Sunk cost
iii)
Notional costs
iv)
Avoidable costs
v)
Incremental revenue
vi)
Controllable costs
(6 marks)
Question 1


(Suggested solution)
In part (b) remember to rank the products according to their contribution per machine hour.
Then the available machine hours according to this ranking.
Do not attempt to apportion the fixed costs to the individual products when you are calculating
the profit in part (c). Simply deduct the total fixed costs from your calculated contribution.
(a) Deficiency in machine hours fro next period:
Product A
Product B
Product C
Machine hours required
per unit
48/8 = 6
32/8 = 4
56/8 = 7
Maximum demand (units)
3 000
2 500
5 000
Total machine hours to meet
maximum demand
18 000
10 000
35 000
Machine hours available
Deficiency in machine hours
(1/2 mark for each correct entry on each product and 1/2 mark for the deficiency)
Total
63 000
50 000
13 000
(b)
Product A
$
200
(154)
46
Selling price per unit
Variable costs per unit
Contribution per unit
Machine hours required
per unit
6
Contribution per machine hour $7.67(1 mk)
Order of production
2 (1 mk)
Product B
$
158
(112)
46
Product C
$
224
(178)
46
4
$11.50(1 mk)
1 (1 mk)
7
$6.57(1 mk)
3(1 mk)
Therefore, make
M/C Hours
10 000(1 mk)
18 000(1 mk)
28 000
Machine hours left to make product C
22 000
50 000
Therefore the company should make 3 142 i.e (22 000/7) units of product C. (1 mk)
2 500 units of product B, using machine hours of (4 x 2 500)
3 000 units of product A, using machine hours of (6 x 3 000)
(c)
Profit for the next period:
Total
Contribution from recommended
Production:
$46 x 3000
$46 x 2 500
$46 X 3 142
Fixed Costs
Profit for the period
397 532
(300 00)(1 mk)
97 532(1 mk)
Product A
$
Product B
$
Product C $
$
138 000 (1 mk)
115 000 (1 mk)
________
138 000
________
115 000
144 532 (1)
________
144 532
d) i) opportunity cost is the cost of the next best alternative forgone
ii) Sunk costs are costs already incurred and cannot be reversed
iii) Notional costs are hypothetical costs taken into account to represent a benefit enjoyed in respect for
which no actual expense has been incurred
iv) Avoidable costs are cost directly linked to an activity such that if that activity is cancelled then no
costs will be incurred
(v) Incremental revenue is additional revenue for selling the extra unit of a product (marginal revenue)
vi) Controllable costs are costs that can be controlled by the division or department where they are being
incurred (1 mark for each correct definition. Students may vary in their expression and any meaningful
definition should be merited)
QUESTION 2
(25 marks)
Mr Sitapata is a chartered accountant who makes custom-built furniture as a hobby.
Recently, a picture of one o f his hand-made lounge suites appeared in a popular fashion
magazine, and ever since then, Mr Sitapata has been inundated with calls from prospective
customers. One of the most interesting calls he has had, was from a well-known guest house
in Windhoek, which has asked him to design and produce mini-lounge suites, consisting
of a coffee table and two chairs, for each of their five guest rooms. The guest house is
expecting a number of delegates from an upcoming NAMA wards to stay over, and therefore
need the lounge suites in two months’ time.
Mr Sitapata would like to take this opportunity to expand his customer base, as he wishes
to retire soon, and would like to turn his hobby into a full-time business. He has
consequently set out the following information which may be relevant to his decision:
1. Mr Sitapata will not be able to meet the two month deadline if he attempts to do all
the work himself, and will therefore have to employ two craftsmen to assist him. The
craftsmen will only be employed for the two months that it is expected to take in order
to complete the five lounge suites. Each craftsman will earn a salary of N$1 500 per
month, and will also be paid overtime at time-and-a-half, should it be required. Normal
clock hours will consist of 8 hours per day, 5 days per week. There are nine full weeks
in the next two months.
2. The craftsmen will also, on normal week days, be served breakfast and lunch at Mr
Sitapata’s house, where the furniture will be produced. The cost of each meal has been
set at N$12.
3. Mr Sitapata has asked his son, currently studying at the local university (IUM), to
oversee the project.
His son is willing to help, but he has indicated that he expects to be remunerated for
his time. Mr Sitapata’s son will be able to spend two hours per day on the project, provided
that Mr Sitapata pays the following:

Petrol to and from his residence, estimated at N$150 for the first month with a
6% increase in the second month;
 Cost of reproducing notes for a class that Mr Sitapata’s son will be forced to
miss as a result of his overseeing function, at N$15 per week;
 an overseer’s fee of N$500 per month, to replace the income Mr Sitapata’s son
could potentially have earned as a waiter at a local restaurant during these two
months.

Mr Sitapata’s son is not prepared to work over weekends.
4. Mr Sitapata already has the upholstery required for the chairs in stock. Approximately
2 kg of upholstery will be required per chair. The upholstery was purchased at a
discounted price of N$50 per kg for a previous project. The upholstery is used on all of
the chairs Mr Sitapata produces, and Mr Sitapata fully intends to use the upholstery
in future for his usual projects, should the guest house contract not be awarded to him.
The current cost for the upholstery is N$60 per kg. Mr Sitapata could also sell the
upholstery at N$25 per kg if it is not used again.
5. Mr Sitapata only uses rose wood for his tables and chairs. Due to the recent drought and
rather extensive bush fires, the wood is hard to come by. Mr Sitapata will have to acquire
the wood from a supplier in Katima Mulilo, who has the wood in stock and ready to
send to Mr Sitapata by rail. Each chair makes use of 3 metres of wood and each table uses
5 metres. The wood is sold at N$24 per meter, and the total rail cost for all of the wood
is N$1 500. It will take approximately two weeks for the wood to be transported from
Katima Mulilo to Windhoek, during which time the craftsmen will work on the upholstery
and trimming required for the chairs.
6. Mr Sitapata will need to rent a bakkie at a cost of N$400 for the day, in order to collect
the wood from the railway station. He will, however, also use the bakkie on the same
day to drive away refuse from his home to the municipal dump. This service is normally
performed by a local old-age pensioner who charges N$80 per load of rubbish. Mr Sitapata
expects to make two trips to the municipal dump.
7. Gold brocade material is used to cover the seats and back rest of the chairs. A total of 30
meters of material will be required for the guest house order, and the material may be
purchased at a cost of N$120 per meter. Off-cuts are expected to amount to 15% of the
material used. Mr Sitapata has decided to stuff five pillows with the cut-offs, at an
additional cost of N$5 per pillow, after which he will donate the pillows to an old-age
home in Katutura.
8. Variable costs of N$15 per chair and N$10 per table are also expected to be
incurred.
9.
Mr Sitapata will use tools that he already owns for this project. Mr Sitapata has
established that a company in a similar line of business, using similar tools, would
write off depreciation of N$1 000 per month for the use of the tools.
10.
The furniture will be produced in Mr Sitapata’s third lock-up garage. The garage
has until now been rented to his next-door neighbour for storing tools, at a cost of
N$200 per month.
11.
Mr Sitapata’s water and electricity bill is currently N$1 500 per month. The bill is
set to increase by 10% per month, half of the increase is due to hikes in the electricity
cost due to recent shortages experienced by NAMPOWER, and the remainder of
the increase is due to additional water and electricity use as a result of the guest
house order.
12.
Towards the end of the life of the project, it will be necessary for Mr Sitapata to
oversee the project himself. As he has already used all of his vacation leave for the
year, he has decided to book two days of sick leave for this purpose and will also
take two days of unpaid leave. He expects that the company where he is currently
employed will subtract N$2 500 from his normal monthly pay for the two days of
unpaid leave.
13.
The rest of the functions he expects to perform, such as the design of the lounge
suites and the moulding of the wood, Mr Sitapata will undertake in the evenings
and over weekends. He will incur no additional costs for these functions.
14.
It will be necessary for Mr Sitapata and the two craftsmen to each work a total of
20 hours of overtime at the end of the two months to complete the order on time.
15. It will cost N$250 to deliver the completed lounge suites to the guest house.
16.
At the end of the project, Mr Sitapata will take photographs of the completed lounge
suites in the guest rooms, for future use in advertisements and flyers. The cost of the
development of these photographs is set at N$120.
17.
Mr Sitapata will charge a small profit of 30% levied on the sum of all relevant
cash flows.
Required:
Mr Sitapata needs a minimum profit of N$4 500 from the order and has approached you, as
his friend to help him make a decision whether to accept the order or not for the guest house.
Advise Mr Sitapata.
Question 2
Suggested solution
(25 marks)
N$
Craftsmen salaries
(2 employees x 2 months x N$1 500)
6 000
Craftsmen’s meals
(2 employees x 2 meals x 9 weeks x 5 days x N$12)
2 160
Overseer
(petrol: N$150 + (N$150 x1.06)
309
(notes: N$15 x 9 weeks)
135
(fee: N$500 x 2 months)
1 000
Upholstery
(5 suites x 2 chairs x 2 kg p chair x N$60 replacement
1 200
Rose wood
(5 x 2 chairs x 3m x N$24) + (5 x 1 table x 5m x N$24)
1 320
Rail cost
Bakkie rental
1 500
(N$400 – (2 trips x N$80 to rubbish dump)
Gold brocade (30 meters x N$120)
240
3 600
Variable costs (5 x 2 chairs x N$15) + (5 x 1 table x N$10)
200
Loss of rental (N$200 per month x 2 months)
400
Electricity
150
(N$1 500 x 5% x 2 months)
Unpaid leave
Overtime
2 500
(N$3000 per employee /(9 weeks x 5 days x 8 hours)
500
= N$8.33 per hour x 1.5 overtime rate x 20 hours
= N$250 x 2 employees
Delivery cost
250
Total cost
21 464
30% profit
6 439
Selling price
27 903
Recommendation:
Mr Sitapata should accept this project because he will get a profit of N$6 439, more than the
minimum profit that he wants. This excludes all other non-financial factors affecting this
project.
Costs omitted
Upholstery purchase price -
Sunk cost – already incurred.
Upholstery selling price
The upholstery is frequently used and will be used again.
Mr Sitapata wouldn’t sell the upholstery at N$25 per kg, only to replace it again at N$60 per
kg.
Cost of pillows
This is not a cost directly linked to the project and it is not
required for the project – Mr Sitapata does not have to incur the cost of the pillows.
Depreciation on tools
Not a cash flow. No indication is given as to the change in
market or replacement value for the tools, and therefore the depreciation is not relevant to this
decision.
5% hike in electricity prices The mandatory hike brought by NAMPOWER’s shortage
would have been incurred in any case and it is therefore not a result of the decision to undertake
this project, and thus not relevant.
Two days sick leave
The two days of sick leave will not cost Mr Sitapata any
money – only the unpaid leave will force a salary sacrifice.
Overtime: Mr Sitapata
As this is on his own time, and there is no indication of
other, more lucrative projects he may have undertaken or any contribution sacrificed, the
overtime for Mr Satapata has not cost.
Photo development cost
This is not a cost as a result of the project – Mr Sitapata
does not have to incur this cash flow: it is avoidable and therefore irrelevant.
Question 3
25 Marks
Taku-Tau Ltd is a company in the civil engineering industry with the headquarters
located 22 miles from Omuthiya undertaking contracts anywhere in Namibia.
The company has had its tender for a job in the north-east Namibia accepted at N$288
000 and work is due to begin in March 2012. However, the company has also been
asked to undertake a contract on the south coast of Namibia. The price offered for this
contract is N$352 000. Both of the contracts cannot be taken at the same time because
of constraints on staff site-management personnel and on plant available.
An escape clause enables the company to withdraw from the contract in the north-east,
provided notice is given before the end of November and an agreed penalty of N$28
000 is paid.
The following estimates have been submitted by the company’s quantity surveyor:
Cost estimates
North-east
N$
Materials:
In stock at original cost, Material X
In stock at original cost, Material Y
Firm orders placed at original cost,
Material X
Not yet ordered – current cost,
Material X
Not yet ordered – current cost,
Material Z
Labour – Hire locally
Site management
Staff accommodation and,
travel for site management
Plant on site –depreciation
Interest on capital, 8%
Total local contract costs
21 600
24 800
30 400
60 000
86 000
34 000
71 200
110 000
34 000
6 800
9 600
5 120
5 600
12 800
6 400
253 520
264 800
North-east
Headquarters costs
Allocated at a rate of 5% ontotal contract costs
Contract price
Estimated profit
Additional information:
South coast
N$
South coast
12 676
266 196
288 000
13 240
278 040
352 000
21 804
73 960
1. X, Y and Z are three building materials. Material X is not in common use and
would not realize much money if resold; however, it could be used on other
contracts but only as a substitute for another material currently quoted at 10%
less than the original cost of X. The price of Y, a material in common use, has
doubled since it was purchased; its net realisable value if re-sold would be its
new price less 15% to cover disposal costs. Alternatively, it could be kept for use
on other contracts in the following financial year.
2. With the construction industry not yet recovered from the recent recession, the
company is confident that manual labour, both skilled and unskilled, could be
hired locally on a subcontracting basis to meet the needs of each of the contracts.
3. The plant which would be needed for the south coast contract has been owned
for some years and N$12 800 is this year’s depreciation on a straight-line basis.
If the north-east contract is undertaken, less plant will be required and the surplus
plant will be hired out for the period of the contract at a rental of N$6 000.
4. It is the company’s policy to charge all contracts with notional interest at 8% on
estimated working capital involved in contracts. Progress payment would be
receivable from the contractee.
5. Salaries and general costs of operating the small headquarters amount to about
N$108 000 each year. There are usually ten contracts being supervised at the
same time.
6. Each of the two contracts is expected to last from March 2012 to February 2013,
which, coincidentally, is the company’s financial year end.
7. Site management is treated as a fixed cost.
Required:
a) Present comparative statements to show the net benefit to the company of
undertaking the more advantageous of the two contracts and advise
management on which contract to choose.
(15 marks)
b) List 2 items and explain the reasoning behind the inclusion if any in your
comparative financial statement of each item given in the cost estimates and the
notes relating thereto.
(4 marks)
c) List 3 items and explain the reasoning behind the omission if any from your
comparative financial statement of each item given in the cost estimates and the
notes relating thereto.
(6 marks)
Question 3
(Suggested solution)
(a)
North East
Material X from stock (1)
19 440
Material Y from stock (2)
49 600
Firm orders of material X (3)
27 360
Material X not yet ordered (4)
60 000
Material Z not yet ordered (5)
Labour (6)
Site management
South coast
71 200
86 000
-
Staff accommodation & travel for site (7)
6 800
Plant rental received (8)
(6 000)
Penalty clause (9)
110 000
5 600
28 000
Total cost
193 600
264 400
Contract price
288 000
352 000
Net benefit
94 400
87 600
(b) Included costs
1. If material X is not used on the North East contract the most beneficial use is to
use it as a substitute material thus avoiding future purchases of N$19 440 (0.9 x
21 600). Therefore by using the stock quantity of material X the company will
have to spend N$19 440 on the other materials.
2. Material Y is in common use and the company should not dispose of it. Using
the materials on the South coast contract will mean that they will have to be
replaced a cost of N$49 600 (N$24 800 x 2). Therefore the future cash flow
impact of taking on the contract is N$49 600.
3. It is assumed that with firm orders of materials it is not possible to cancel the
purchase. Therefore the cost will occur whatever future alternative is selected.
The materials will be used as substitute material if they are not used on the
contract and therefore, based on the same reasoning as point 1 above, the
relevant cost is the purchase price of the substitute material (0.9 x N$30 400).
4. The material has not been ordered and the cost will only be incurred if the
contract is undertaken. Therefore additional cash flows of N$60 000 will be
incurred if the company on the North East contract.
5. The same principles apply here as were explained in point 4 and additional
cash flows of N$71 200 will be incurred only if the company takes on the South
coast contract.
6. It is assumed that labour is an incremental cost and therefore relevant.
7. The costs would be undertaken only if the contracts are undertaken. Therefore
they are relevant costs.
8. If the North East contract is undertaken the company will be able to hire out
surplus plant and obtain a N$6 000 cash inflow.
9. If the South coast contract is undertaken the company will have to with draw
from the North East contract and incur a penalty cost of N$28 000.
(C) Excluded costs
1. The headquarter costs will continue whichever alternative is selected and they
are not relevant costs.
2. It is assumed that there will be no differential cash flows relating to notional
interest. However, if the interest costs associated with the contracts differ then
they would be relevant and should be included in the analysis.
3. Depreciation is a sunk cost and irrelevant for decision –making.
4. The site management function is performed by staff at central headquarters. It
is assumed that the total company costs in respect of site management will
remain unchanged in the short term whatever contracts are taken on. Site
management costs are therefore irrelevant.
Question 4
30 Marks
PMS plc is a large diversified organisation with several departments. It is concerned over
the performance of one of its departments – department P. PMS plc is concerned that
department P has not been able to meet its sales target in recent years and is considering
either to reduce the level of production or to shut down the department.
The following information has been made available:
Budgeted sales and production in units
Sales
Less: production costs
Material A – 1 kg per unit
Material B – 1 litre per unit
Labour – 1 hour per unit
Variable overhead
Fixed overhead
Non-production costs
Total cost
Budgeted profit
50 000
N$
(000)
500
50
25
125
100
50
50
400
100
The following additional information has also been made available:
(i) There are 50 000 kg of material A in inventory. This originally cost N$1 per kg.
Material A has no other use and unless it is used by the division it will have to be disposed of at a cost of N$500 for every 5 000 kg.
(ii) There are 30 000 litres of material B in inventory. Any unused material can be used
by another department to substitute for an equivalent amount of a material, which
currently costs N$1.25 per litre. The original cost of material B was N$0.50 per litre
and it can be replaced at a cost of N$1.50 per litre.
(iii) All production labour hours are paid on an hourly basis. Rumours of the closure of
the department have led to a large proportion of the department’s employees leaving
the organisation. Uncertainty over its closure has also resulted in management not
replacing these employees. The department is therefore short of labour hours and has
sufficient to produce 25 000 units. Output in excess of 25 000 units would require
the department to hire contract labour at a cost of N$3.75 per hour. If the department
is shut down the present labour force will be deployed within the organisation.
(iv) Included in the variable overhead is the depreciation of the only machine used in the
department. The original cost of the machine was N$200 000 and it is estimated to have
a life of 10 years. Depreciation is calculated on a straight-line basis. The machine has a
current resale value of N$25 000. If the machinery is used for production it is estimated
that the resale value of the machinery will fall at the rate of N$100 per 1,000 units
produced. All other costs included in variable overhead vary with the number of
units produced.
(v)Included in the fixed production overhead is the salary of the manager of department
P which amounts to N$20 000. If the department were to shut down the
manager would be made redundant with a redundancy pay of N$25 000. All other
costs included in the fixed production overhead are general factory overheads and
will not be affected by any decision concerning department P.
(vi) The non-production cost charged to department P is an apportionment of the
total non-production costs incurred by the department.
(vii) The marketing manager suggests that either:
● a sales volume of 25 000 units can be achieved with a selling price of N$9.00
per unit and an advertising campaign of N$25 000; or
● a sales volume of 35 000 units can be achieved at a selling price of N$7.50 with
an advertising campaign costing N$35 000.
Requirements
(a) As the management accountant of PMS plc you have been asked to investigate the
following options available to the organisation:
Reduce production to 25 000 units
Reduce production to 35 000 units
Shutdown department P.
(b) Discuss the relevance of opportunity costs in decision-making
Question 4
a)
(Suggested solution) (25 marks)
Relevant savings & revenues
Sales revenue
Material B
Sale of machinery
Total revenue/savings
25 000 units
N$
225 000√
6 250√
22 500√
253 750
35 000 units
N$
262 500√
21 500√
284 000
Shut down
N$
37 500√
25 000√
62 500
Relevant costs
Material A disposal
Purchase material B
Labour
Variable overhead (depreciation-excl.)
Advertising campaign
Manager’s salary
Redundancy pay
Total relevant costs
Net savings
N$
2 500√
62 500√
40 000√
25 000√
20 000√
150 000
103 750√√
N$
1 500√
7 500√
100 000√
56 000√
35 000√
20 000√
220 000
64 000√√
N$
5 000√
25 000√
30 000
32 500√√
25 000 units
35 000 units
shut down
25 000
N$9
N$225 000
35 000
N$7.50
N$262 500
(√= Half mark)
Workings:
Sales revenue:
No. of units
Selling price
Sales revenue
Saving made on material B:
Surplus available
Saving per litre
Total saving
Sale of machinery:
Current market price
Reduction in value
Sales proceeds
Disposal of material A:
Quantity to be disposed of
Cost of disposal
Purchase cost of material B:
Production requirement
No. of litre to be purchased
Purchase cost
Labour costs:
Normal labour costs
Contract labour
Variable overheads
@ N$1.60 per unit (variable overhead per unit)
Total variable overhead
Less: Depreciation
Variable overhead (Total)
Units
5 000√√
N$1.25√
N$6 250
-
30 000√√
N$1.25√
N$37 500
N$25 000
N$2 500√
N$22 500
N$25 000
N$3 500√
N$21 500
N$25 000√
N$25 000
25 000
N$2 500
15 000
N$1 500
50 000
N$5 000
25 000
-
35 000
5 000√
N$7 500
N$62 500
N$62 500
N$62 500√
N$37 500√
N$100 00
N$40 000
N$100 000
N$20 000√√
N$80 000√
50 000
N$56 000
Variable cost per unit
N$1 .60√√
(√=Half mark)
b) An opportunity cost is the value which represents the cost of the next best alternative or the benefit
forgone by accepting one course of action in preference to others when allocating scare resources √.
If there is only one scare resource, decisions can be made by ranking alternatives according to their
contributions per unit of scare resource√. However, in reality, there will be many scare resources, and
different alternatives will use alternative combinations of those scare resources. In these situations
opportunity costs are used to identify the optimum use of those resources√. (3 Marks)
Question 5
Chineke Ltd produces two products, join product 1 and joint product 2, using
common manufacturing process. The joint cost that arise out of the common process
are N$3 750.
Joint product 1
Joint product 2
N$
N$
Sales value at split off point
1 875
2 250
Sales value after further processing
2 625
5 250
Allocated joint costs
1 704.55
2 045.45
Cost of further processing
800
2 500
.
Required:
Determine whether joint products 1 and 2 should be sold at split or be further
processed. The net realisable method must be used to allocate joint cost and all
units produced where sold.
Question 6
Philander Ltd manufactures and sells fancy pencils. Plant capacity is 100 000 units
per year and there are no inventories at the end of the year. The following budgeted
income statement has been prepared:
Details
Sales (80 000 units)
- Manufacturing costs:
Direct material
Direct labour
Overheads (50% variable)
Gross income
- Marketing and administrative costs (50%
variable)
Net income
Per unit (N$)
16
5
2
6
Total (N$)
1 280 000
400 000
160 000
480 000
240 000
80 000
160 000
The company has received a special order to sell 30 000 units of its fancy pencils at
N$11 each.
Required:
Make a recommendation as to whether the company should accept this special
order. Your answer should be substantiated by relevant calculations.
Note: The variable portion of marketing and administrative costs is for commission.
Commission will not have to be paid on the special order.
Question 7
25 Marks
KO-KA-KU (Pty) manufactures large structural fabricated metal items. The county
government has invited companies to tender for the construction of a display board,
which will provide tourist and traffic information using a computerized electronic faceboard.
The display board will take 60 days to manufacture and erect on site and start date is
exactly one month from today. KO-KA-KU (Pty) Ltd is currently preparing the tender
documents for submission. Competition for the project is expected to be aggressive
and management is therefore keen to submit its best possible price.
The following information is relevant to the tender bid:
1. Direct materials
In inventory
Required
Purchase
Current
price inventory purchase
price
items
Current
resale price
Rods - coated
1 000m
2 000m
N$40/m
N$35/m
N$30/m
Sheet metal
600m²
270m²
N$30/m²
N$32/m²
N$30/m
Brace bars
1 500 units
4 000 units
N$10/unit
N$10.5/unit N$8.50/ unit
The coated rods and sheet metal are in continuous and regular use by KO-KA-KU
(Pty) Ltd, but the brace bars are not. The latter are surplus from a project that was
completed a year ago and the company has just received an offer from a scrap metal
dealer to purchase them at the resale price.
The company also has 2 000 metres of uncoated rods in inventory which could be
used if they were coated, although it is not common practice to do this in the industry.
The cost of coating is N$10 per metre. If they are not used for the provincial
government job, they will be disposed of for N$15 per metre. The company will only
acquire coated rods in future.
Other materials, of which none are currently in inventory (concrete, blocks, bolts etc)
will need to be purchased at a total cost of N$100 000.
2. Project Management and labour
A site engineer will be on site for the entire duration of the project. His normal
monthly salary is N$12 000. It is estimated that he will work 100 hours of overtime
on the project at a rate of N$100 per hour.
The project requires ten workers for sixty days, their normal daily wage being
N$120 per day. In the event that KO-KA-KU (Pty) Ltd is unsuccessful in the
provincial government tender, they intend retrenching the ten workers at a total
cost of N$20 000 to the company. However, should they be successful in the tender
then management believe that no retrenchment will be necessary.
3. Equipment
Special hoisting equipment would have to be hired at a cost of N$2 000 per day
for ten days.
The company would use its argon welder (acquired six months ago), which has
never been used and is not likely to be used on any other project in the
foreseeable future. It cost N$60 000, and is being depreciated over five years
on a straight-line basis. “We must include the cost of this in the bid, so we can
recover the costs incurred,” says the company’s production engineer.
4. Out of town expenses
Accommodation and related expenses for the site will amount to N$1 000 per
day for the duration of the project.
5. Electronic Face-board
This will be acquired at a cost of N$100 000.
6. Other expenses
The company has already paid N$5 000 non-refundable tender levy to obtain
the tender documents. Variable overheads have been estimated to be N$500
per day for the duration of the project. Head office fixed overheads are charged
at the rate of N$2 000 per day.
7. Normal price
The company’s policy is to apply a mark-up of 25% on full costs of the project.
Full-cost comprises all direct and indirect costs. For normal pricing purpose,
direct materials are costed on a first-in-first-out (FIFO) basis.
8. Other projects
The company has successfully bid for a project in Mozambique, which is due
to start at the same time as the provincial government tender and will result in
a contribution towards general fixed costs of N$200 000. However, KO-KA-KU
(Pty) Ltd cannot undertake both projects, as each requires the company’s best-
qualified site engineer to oversee them. If KO-KA-KU (Pty) Ltd were to withdraw
from the Mozambique project, they would incur a penalty of N$25 000.
Required:
a) Advice the management of KO-KA-KU (Pty) Ltd whether to reject or accept
the tender if the government is willing to pay them a tender price of N$ 800
000.
(18 marks)
b) List 2 items and explain the reasoning behind the omission if any from your
calculation. (4 marks)
c) Identify three qualitative factors that management of KO-KA-KU (Pty) Ltd may
want to consider before submitting their tender price. (3 marks)