-week period (1 January 2022 – 14 January 2022). Whilst this is not a particularly large contract for OBL, the Board of Directors is hopeful that significantly more work will follow. The data relating to the production of each component is as follows:
Orange Box Limited (‘OBL’) is a small specialist manufacturer of specialist electronic components, selling much of its output to both civil and military aircraft manufacturers.
It is 1 December 2021 and one of these aircraft manufacturers has offered a contract to OBL for the supply of 200 identical components over a two-week period (1 January 2022 – 14 January 2022). Whilst this is not a particularly large contract for OBL, the Board of Directors is hopeful that significantly more work will follow.
The data relating to the production of each component is as follows:
Material requirements
3 kg material X1
Material X1 is in continuous use by the company. 500 kg are currently held in inventory. These materials were purchased for £5.15/kg but it is known that future purchases will cost
£5.50/kg
2 kg material X2
600 kg of material X2 are held in inventory. The original cost of this material was £3.55/kg but, as the material has not been required for the last two years, it has been written down to its scrap value of £1.50/kg. The only foreseeable alternative use is as a substitute for material X4 (in current continuous use) but this would involve further
£2.50/kg. The current cost of material X4 is £4.50/kg.
1 component JKL
There are 500 components of JKL in inventory. These originally cost £50 each but have no other use in OBL.
Labour requirements
Each component would require five hours of skilled labour and five hours of semi-skilled labour.
- Skilled labour is currently paid £15/hour. Replacement workers would, however, require to be hired at a rate of £14/hour for the work which would otherwise be done by the skilled
- The current rate for semi-skilled work is £12/hour and OBL will require to hire these workers as the company currently has no semi-skilled
There is also a requirement for two weeks of time for a specialist engineer who is paid a weekly salary of £1,000 for working a 40-hour week. She would be required to be removed from another contract (Contract ZZZ) which generates a contribution of £5 per engineer hour. There are no other engineers available to continue with Contract ZZZ if she is taken off this contract. This would mean that OBL would miss its contractual deadline on Contract ZZZ (14 January 2022) by two weeks and would require to pay a one-off penalty of £2,500. As there is no other work currently scheduled for the engineer after 14 January 2022, it will not be a problem for OBL to complete Contract ZZZ at this point.
The supervisor who will be responsible for the new contract with the aircraft manufacturer should it be won, is paid an annual salary of £52,000. She has the capacity within her existing workload to supervise this new contract. It is OBL corporate policy to allocate supervisor salary costs to individual contracts on the basis of time spent.
Overheads
OBL absorb overheads by a machine hour rate, currently £22/hour, of which £8 is for variable overheads and £14 for fixed overheads. If this contract is undertaken, it is estimated that fixed costs will increase for the duration of the contract by £5,500. Spare machine capacity is available and each component would require four machine hours.
Other information
The CEO of OBL required to hold a meeting with the CEO of the aircraft manufacturer in November 2021 to discuss the proposed contract requirements. The costs of this meeting were £500. A contract price of £225 per component was suggested by the CEO of the aircraft manufacturer after the meeting.
Required:
- Advise the Board of Directors whether the contract should be accepted. Support your conclusion with appropriate figures and explanations. Show all
- Comment on four factors that the Board of Directors ought to consider and which may influence its final
(Five maximum word limit)
![Financial ratios
Creditors days
Working capital
Cost of capital
Gross margin (%)
Economic order quantity (EOQ)
Cost of equity
Trade payables
Gross profit
x 365
Purchases
× 100
2DC
ke =
Do(1+g)
+ g
Po
Revenue
or
H
Operating margin (%)
Trade creditors
or
Operating profit
x 100
x 365
Cash management (1)
Purchases
ke = R, + B(Rm – R;)
Revenue
If 'Purchases' figure not available, use 'Cost of sales
2NF
Z =
Return on capital employed (%)
Financial gearing (%)
WACC
Cash management (2)
Ve
ke:
Ve+Va
Va
+ ka (1 – t)
Operating profit
x 100
Long-term debt
Shareholders equity + Long-term debt
x 100
Ve+Va
Long-term debt + Shareholders equity
Return on equity (%)
S = 3
Parity theory
Interest cover (times)
Operating profit
Interest charges
Profit after taxation
x 100
Learning curve
PPPT
Shareholders equity
(1+ir)
Return on total assets (%)
y = axb
S1 = So
(1+in)
Earnings per share (EPS)
Profit after taxation
Variances
x 100
IRPT
Profit after taxation
Total assets
Number of ordinary shares in issue
Sales price
(1+if)
Asset turnover
Price I earnings ratio (PIE)
(Actual selling price – Budgeted selling price) x Actual units sold
Fo = So
(1+in)
Revenue
Share price
Financial arithmetic
Total assets
Sales volume
Earnings per share
Current ratio
(Actual units sold – Budgeted quantity) x Budgeted contribution per unit
Effective annual rate of interest
Earnings yield
Current assets
Material price
[1+"-1
Current liabilities
Earnings per share
Quick test (acid ratio)
(Budgeted cost – Actual cost) x Actual quantity used
Share price
Present value of I
Current assets - Inventory
Dividend per share (DPS)
Material usage
[1+ r]-"
Present value of an annuity of I
Current liabilities
Total dividends for the period
(Budgeted quantity – Actual quantity) x Budgeted cost per unit
Working capital turnover
Number of ordinary shares in issue
Labour rate
Revenue
Dividend cover
1-(1+r)-"
Net working capital
(Budgeted rate – Actual rate) x Actual time taken
Profit after taxation
Inventory turnover
Labour efficiency
Total dividends for the period
(Budgeted time - Actual time taken) x Budgeted rate
Cost of sales
Dividend payout (%)
Inventory
Total dividends for the period
Variable overhead rate
Inventory days
x 100
Profit after taxation
(Budgeted rate – Actual rate) x Actual time taken
Inventory
x 365
or
Cost of sales
Variable overhead efficiency
DPS
Debtors days
× 100
(Budgeted time - Actual time taken) x Budgeted rate
EPS
Dividend yield
Trade receivables
x 365
Fixed overhead expenditure
Revenue
Dividend per share
(Budgeted fixed overhead – Actual fixed overhead)
or
Share price
Trade debtors
x 365
Revenue](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F20e89e84-1f9d-4d0d-a210-ee26b38b2d2b%2F0c6f303b-6f6e-4eae-9888-9ac9d5ad11e0%2Fnfe23x_processed.jpeg&w=3840&q=75)
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