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Q2. Malama Limited is considering whether to continue the work on an existing contract or to terminate it now and pay an agreed penalty of K90, 000, 000 to the client. This is being considered because the penalty is less than the anticipated contract loss. The following summary has been prepared:

Q2. Malama Limited is considering whether to continue the work on an existing contract or to terminate it now and pay an agreed penalty of K90, 000, 000 to the client. This is being considered because the penalty is less than the anticipated contract loss. The following summary has been prepared:

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Q2. Malama Limited is considering whether to continue the work on an existing contract or to terminate it now and pay an agreed penalty of K90, 000, 000 to the client. This is being considered because the penalty is less than the anticipated contract loss. The following summary has been prepared: Expenditure to date Estimated future costs to completion in one (1) years' time Material Staffing Overheads Estimated total cost Contract value Estimated loss on contract The following information is also available: K'000 other contracts. 80, 000 50,000 90,000 K'000 150,000 220,000 370,000 200,000 80,000 Material Contracts have been exchanged for the purchase of the K60, 000, 000 materials. This is special purpose material which has no alternative use. If not used on this contract it will incur disposal costs of K10, 000, 000. Staffing Two specialists are employed on the contract each at K12, 500, 000 p.a. If the contract was terminated now they would each receive K7,000, 000 redundancy pay. The other K5,000,000 staffing cost is the allocated cost for a supervisor who is also in charge of several Overheads The K60, 000, 000 comprises K20, 000, 000 specific to the contract and K40, 000, 000 general fixed overheads allocated to the contract. Required: Prepare relevant financial information so that the firm can decide whether or not to abandon the contract.
Transcribed Image Text:Q2. Malama Limited is considering whether to continue the work on an existing contract or to terminate it now and pay an agreed penalty of K90, 000, 000 to the client. This is being considered because the penalty is less than the anticipated contract loss. The following summary has been prepared: Expenditure to date Estimated future costs to completion in one (1) years' time Material Staffing Overheads Estimated total cost Contract value Estimated loss on contract The following information is also available: K'000 other contracts. 80, 000 50,000 90,000 K'000 150,000 220,000 370,000 200,000 80,000 Material Contracts have been exchanged for the purchase of the K60, 000, 000 materials. This is special purpose material which has no alternative use. If not used on this contract it will incur disposal costs of K10, 000, 000. Staffing Two specialists are employed on the contract each at K12, 500, 000 p.a. If the contract was terminated now they would each receive K7,000, 000 redundancy pay. The other K5,000,000 staffing cost is the allocated cost for a supervisor who is also in charge of several Overheads The K60, 000, 000 comprises K20, 000, 000 specific to the contract and K40, 000, 000 general fixed overheads allocated to the contract. Required: Prepare relevant financial information so that the firm can decide whether or not to abandon the contract.
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Step 1: Decision making:

It is the process of making decisions that involve the management of costs in order to achieve long-term goals and objectives. It involves analyzing the cost of various options and choosing the most effective and efficient course of action.

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