SECTIONC Management Accountin Answer ONE question from Secti

SECTIONC Management Accountin Answer ONE question from Section C 6. Henderson Plc is involved in the design and manufacture of custom built factory equipment. The company has just received an enquiry about the supply of 10 machines from a new client in the USA, BRC Ltd. BRC Ltd has informed the company that the maximum price they are willing to pay for each machine is £ 7,000. Henderson is not operating in its full capacity The following details relates to the production of the machines . Each machine would require 10 units of Material A, which is used regularly by the company. The company has 120 units of Material A in stock, which originally cost £150 per unit. The replacement cost of Material A is £170 per unit. . Each machine would also require 5 units of Material B. The company has 50 units of Material B in stock, as it was purchased a few years ago for use in the production of other equipment which the company no longer produces. The original purchase price for the units of Material B, in stock, was £ 200 per unit. The replacement cost of Material B is 160 per unit. The resale value for the units of Material B in stock is £140 per unit. Each machine would require 8 units of Material C, a material that the company has never used. The purchase cost per unit of Material C is £250 . 10 skilled hours, per machine, would be required. Skilled workers are paid £20 per hour and are part of the permanent work-force. At present there are 100 paid surplus skilled hours per month. · 20 unskilled hours, per machine, would be required. Unskilled workers are paid £ 12 per hour and are employed on a casual basis . A supervisor, with the necessary experience in the production of similar machines, who is currently paid £ 40,000 per annum, would be transferred to the job. This would necessitate the hiring of a replacement supervisor for the duration of the contract at a cost of £7,000 . Each machine would require 15 hours processing time on the factory equipment. If the order is not accepted then Henderson Plc would sub- contract the factory equipment to Jones Ltd at a rate of £100 per hour The company estimates that the depreciation charge for using the factory equipment to produce the 10 machines would be £4,000 PTO

Solution

An amount that has to be paid or given up in order to get something.

Ordre Size	10 machines	Price	7000
	Machine	Units	Total	Stock	Org cost	Repcost	Resale	Total cost
Mat A	10	10	100	120	150	170		17000	Relevant - requirement is less than stock , consedering stock of A will be maitained at 120 and use if regular we have to take replacment cost for relevant costing
mat B	10	5	50	50	200	160	140	10000	Relevant - requirement is equal to the stock , and co do not need this product hence we have to take org cost for relevant cositng , because co wont going to buy more from market
mat C	10	8	80	0		250		20000	Relevant - because this has to be bought from the market upon accpeting the order
Skilled	10	10	100	100	20			0	Not Relevant because already there is 100 surplus hours , and we also need 100 hours to mfg machines
Unskilled	10	20	200		12			2400	Relevant because they are employed on casual basis
Processing time	10	15	150	0	100			15000	Totally relevant because we go for this order then we loose 100 per hour
Variable OH	10	10	100		50			5000	Relevant due to nature is varible and it has to be incurrred when accepting order
Fixed Prod OH								0	Not relevant because these are fixed and dosent relates with new order
R & D study cost								0	Not relevant because it is sunk cost and already incurred .
Dep								0	Not relevant due to company not operating on full capacity
Replacement of supervisor						7000	Relevant because new supervisor has to be taken in the factory
								76400
							machines	10
							Per Machine	7640
cost
An amount that has to be paid or given up in order to get something.
Relevant cost
Relevant cost is a managerial accounting term that describes avoidable costs that are incurred when making business decisions.
Importance of qualitative facotors in essential in relevant closting because relevant costing focuses on maxmimum profits and quantity benefits n , it dosent take other factors into account .
For example -
1 External relation - handerson might loose their connection with their long term client namely jones ltd iof they choose to go for this order
2. In most cases, quantitative information neglects to provide information on quality. Businesses, smartly looking to reduce costs, must be cautious to avoid sacrificing the long-term benefit of being associated with quality products and services for the short-term quantitative benefit of cutting costs