RFT, an engineering company, has been asked to provide a quotation for a contract to build a new engine. The potential customer is not a current customer of RFT, but the directors of RFT are keen to try and win the contract as they believe that this may lead to more contracts in the future. As a result they intend pricing the contract using relevant costs.
The following information has been obtained from a two-hour meeting that the Production Director of RFT had with the potential customer. The Production Director is paid an annual salary equivalent to R1 200 per 8-hour day.
110 square metres of material A will be required. This is a material that is regularly used by
RFT and there are 200 square metres currently in inventory. These were bought at a cost of
R12 per square metre. They have a resale value of R10.50 per square metre and their current replacement cost is R12.50 per square metre.
30 litres of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by RFT. The minimum order quantity from the supplier is 40 litres at a cost of R9 per litre. RFT does not expect to have any use for any of this material that remains after this contract is completed.
60 components will be required. These will be purchased from HY. The purchase price is R50 per component.
A total of 235 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is R11 per hour. Currently RFT has 75 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of R14 per hour; or (ii) recruiting temporary staff at a cost of R12 per hour. However, if temporary staff are used they will not be as experienced as RFT’s existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of R18 per hour for this work.25 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of R600. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is R7 per hour.
The company absorbs its fixed overhead costs using an absorption rate of R20 per direct labour hour.

Calculate the relevant cost of building the new engine. You should present your answer in a schedule that clearly shows the relevant cost value for each of the items identified above.
Explain each relevant cost value you have included in your schedule and why the values you have excluded are not relevant.

Save your time - order a paper!

Get your paper written from scratch within the tight deadline. Our service is a reliable solution to all your troubles. Place an order on any task and we will take care of it. You won’t have to worry about the quality and deadlines

Order Paper Now


"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"