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Question 1 – 10 marks
Glenrock Ltd is considering whether to supply a large departmental store with its
products. The contract will last for 50 weeks. The accountant at Glenrock has prepared the following estimates:

Material X in stock at original cost    $ 150,000
Material Y on order (contract price)    180,000
Material Z to be ordered    300,000
    
Labour : Skilled Men    540,000
Non – Skilled Men    300,000
Supervisory Staff    100,000
    
General Overheads    1.080,000
Total Cost    2,650,000



Additional information is available as follows:

a)  Material X is an obsolete material. It can, however be used as a substitute on another contract for material costing $135,000 after some adaptation work which would cost $27,000.

b)  Material Y was ordered some weeks ago for other  work for which is no longer required. It now has a residual value of $210,000.

c)  The skilled men will be transferred from other work to this contract. Their places on the other work will be filled with a greater number of less skilled workers at a cost of $570,000 for a 50 week period.

d)  The non- skilled labour will be specially employed for the contract period.

e)  The supervisory staff will be retained, whether or not the contract is accepted, at the present salary levels. If available, two of them could be used to fill junior management vacancies for the period of the contract. The management vacancies have a total salary bill of $35,000.The remaining supervisors would be used as covers for holidays, sickness, etc.

f)   General Overheads have been charged at 200% of skilled wage cost. Only
$125,000 would be avoidable if the contract does not go ahead.

Required: Determine the minimum contract price for the contract.

Question 2 – 10 marks
Perfumes Co manufactures and sells its standard perfume by blending a secret
formula of aromatic oils with diluted alcohol. The standard perfume is highly branded
and successfully sold at a price of $399.80 per litre.

Perfumes Co is considering processing some of the perfume further by adding a hormone to appeal to members of the opposite sex. Market research carried out has already cost $3,000 and this amount is due for payment in the next 2 months.

Data has been prepared for the costs and revenues expected for the following month (a test month) assuming that a part of the company’s output will be further processed by adding the hormones.

The output selected for further processing is 1,000 litres, about a tenth of the company’s normal monthly output. Of this, 99% is made up of diluted alcohol which costs $20 per litre. The rest is a blend of aromatic oils costing $18,000 per litre. The labour required to produce 1,000 litres of the basic perfume before any further processing is 2,000 hours at a cost of $15 per hour.

Of the output selected for further processing, 200 litres (20%) will be for male customers. and 2 litres of hormone costing $7,750 per litre will then be added. Adding of the hormone adds to the overall volume of the product as there is no resulting processing loss.

Perfumes Co has sufficient existing machinery to carry out the test processing.

Extra labour will be required to further process the perfume, with an extra 500 hours
for the male version. Labour is currently fully employed, making the standard product. New labour with the required skills will not be available at short notice.

Prefumes Co allocates fixed overhead at the rate of $25 per labour hour to all products for the purposes of reporting profits.

The sales prices that could be achieved as a one-off monthly promotion are:
$750 per litre for the male version.

Required:
Provide calculations to advise whether Perfume Co should experiment with the hormone adding process for the male hormone.
Question 3 – 10 marks

a)   Describe the purposes of target costing. (3 marks)

b)   Distinguish between target costing and Kaizen costing. (2 marks)



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