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1 State whether or not the contract should be accepted and support your conclusion with appropriate figures.

1 State whether or not the contract should be accepted and support your conclusion with appropriate figures.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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State whether or not the contract should be accepted and support your conclusion with appropriate figures. 1.
Transcribed Image Text:State whether or not the contract should be accepted and support your conclusion with appropriate figures. 1.
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 few aircraft manufacturers has offered a contract to JB Limited for the supply, over the next months, of 400 identical components. The data related to the production of each component are as follows: O Material requirements 3 kg material M1: see note 1 2 kg material P2: see note 2 1 part N° 678: see note 3 Note 1: Material M1 is in continuous use by the company. 1000Okg are currently held in stock at a book value of £4.70 per kg, but it is known that the current purchase price is £5.50 per kg. Note 2:1 200 kg of material P2 are held in stock. The original cost of this material was £4.30 per kg, but as this material has not been required for the last two years it has been written down to £1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for material X4 (in current use), but this would involve further processing costs of £1.60 per kg. The current purchase price of material X4 is £3.60 per kg. Note 3: Part N° 678 is not in stock. This material should be bought in bulk at a price of £25 000 for 750 units N° 678. There is no foreseeable alternative use for the oversupply. (i) Labour requirements Each component would require 5 hours of skilled labour and five hours of semi-skilled. Skilled workers have a fixed contract and earn a fixed wage. Semi-skilled workers are paid on an hourly basis. It is impossible to hire new skilled workers, due to scarcity on the labour market. Consequently, 409% of the hours necessary to execute the special contract, will happen by means of overtime (the remaining 60% will exploit the available excess capacity). A skilled worker is paid £25 per hour, the premium for overtime is 35% of the normal wage rate. The current rate for semi-skilled workers is £10 per hour and an additional worker could be appointed fort his work. (i) Overhead The production overhead is allocated by number of machine hours, currently £20 per machine hour, of which £7 is for variable overhead and £13 for fixed overhead. If this contract is undertaken it is estimated that fixed costs will increase for the duration of the contract by £ 3 200. Spare machine capacity is available and each component would require 4 machine hours. Concerning the non-production overhead, JB is used to allocate £1000 of the existing fixed administrative costs to an order of this size. A price of £250 per component has been suggested by the large company which makes aircraft. REQUIRED:
Transcribed Image Text: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 few aircraft manufacturers has offered a contract to JB Limited for the supply, over the next months, of 400 identical components. The data related to the production of each component are as follows: O Material requirements 3 kg material M1: see note 1 2 kg material P2: see note 2 1 part N° 678: see note 3 Note 1: Material M1 is in continuous use by the company. 1000Okg are currently held in stock at a book value of £4.70 per kg, but it is known that the current purchase price is £5.50 per kg. Note 2:1 200 kg of material P2 are held in stock. The original cost of this material was £4.30 per kg, but as this material has not been required for the last two years it has been written down to £1.50 per kg scrap value. The only foreseeable alternative use is as a substitute for material X4 (in current use), but this would involve further processing costs of £1.60 per kg. The current purchase price of material X4 is £3.60 per kg. Note 3: Part N° 678 is not in stock. This material should be bought in bulk at a price of £25 000 for 750 units N° 678. There is no foreseeable alternative use for the oversupply. (i) Labour requirements Each component would require 5 hours of skilled labour and five hours of semi-skilled. Skilled workers have a fixed contract and earn a fixed wage. Semi-skilled workers are paid on an hourly basis. It is impossible to hire new skilled workers, due to scarcity on the labour market. Consequently, 409% of the hours necessary to execute the special contract, will happen by means of overtime (the remaining 60% will exploit the available excess capacity). A skilled worker is paid £25 per hour, the premium for overtime is 35% of the normal wage rate. The current rate for semi-skilled workers is £10 per hour and an additional worker could be appointed fort his work. (i) Overhead The production overhead is allocated by number of machine hours, currently £20 per machine hour, of which £7 is for variable overhead and £13 for fixed overhead. If this contract is undertaken it is estimated that fixed costs will increase for the duration of the contract by £ 3 200. Spare machine capacity is available and each component would require 4 machine hours. Concerning the non-production overhead, JB is used to allocate £1000 of the existing fixed administrative costs to an order of this size. A price of £250 per component has been suggested by the large company which makes aircraft. REQUIRED:
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