Question 1
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
Rods - coated
Sheet metal
Brace bars
In inventory
Required
1 000m
600m²
1 500 units
2 000m
270m²
4 000 units
Purchase
price inventory
items
N$40/m
N$30/m²
N$10/unit
Current
purchase
price
N$35/m
N$32/m²
N$10.5/unit
Current
resale price
N$30/m
N$30/m
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 bestqualified 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)