Build Limited plans to start a project (Project X) for the forthcoming year that will be sold to an international corporation. Build Limited is yet to pay for the research costs to date, which total Rs. 150,000. The following additional costs have been estimated by the managing director to complete project X. Machinery Project X will require a specialised machinery which cost Rs. 18,000 three years ago. It has a current disposal value of Rs. 8,000 and if used in project X, it is estimated that the disposal value in one year’s time will be Rs. 6,000. Labour Project X will require skilled labour which is hard to recruit in the present situation. Workers will have to be transferred from another project (project O) which is currently in operation. Project O is expected to generate sales of Rs. 150,000 in the next year. The prime cost of these sales is expected to be Rs. 100,000, including Rs. 40,000 for the labour cost itself. The overhead absorbed into this production (project O) is expected to be Rs. 20,000. Share of general building services Project X will be charged with Rs. 35,000 per annum to cover generalbuilding expenses. The space that will be occupied by project X is currently being sublet to a local community group for gatherings and entertainment at an annual rent of Rs. 7,500. Build Limited will advise the group to seek another location for the forthcoming year. Required: (a) Using relevant costing principles, determine the minimum price at which project X can be sold to the MNC to ensure that Build Limited break-even on this project. You are also required to critically explain the reasons for the treatment of each item.
Build Limited plans to start a project (Project X) for the forthcoming year that will be sold to an international corporation. Build Limited is yet to pay for the research costs to date, which total Rs. 150,000. The following additional costs have been estimated by the managing director to complete project X.
Machinery
Project X will require a specialised machinery which cost Rs. 18,000 three years ago. It has a current disposal value of Rs. 8,000 and if used in project X, it is estimated that the disposal value in one year’s time will be Rs. 6,000.
Labour
Project X will require skilled labour which is hard to recruit in the present situation. Workers will have to be transferred from another project (project O) which is currently in operation. Project O is expected to generate sales of Rs. 150,000 in the next year. The prime cost of these sales is expected to be Rs. 100,000, including Rs. 40,000 for the labour cost itself. The
Share of general building services
Project X will be charged with Rs. 35,000 per annum to cover generalbuilding expenses. The space that will be occupied by project X is currently being sublet to a local community group for gatherings and entertainment at an annual rent of Rs. 7,500. Build Limited will advise the group to seek another location for the forthcoming year.
Required:
(a) Using relevant costing principles, determine the minimum price at which project X can be sold to the MNC to ensure that Build Limited break-even on this project. You are also required to critically explain the reasons for the treatment of each item.
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