Costs and revenue, Cost Accounting

Costs and Revenue

  • Cost of the development work done in-house to 1 January 2009 has been £1.5m with a further cost of £50,000 per month from now until the software is ready for sale (1 January 2010).
  • The mathematical and data administration development will be outsourced to Matdaad Ltd at £300 an hour. Gordon estimates that it will take 10,000 hours of work to deliver the Standard Level and a further 15,000 to deliver the Premier Level upgrade. Matdaad Ltd require 50% of the contract value to be paid at the start of the contract (1 January 2010) and the rest in equal monthly instalments from January to October 2010.
  • The Matdaad consultants will work in premises provided by Finance-IT Ltd. This is likely to be in a suite of rooms currently occupied by the Finance-IT customer service unit. The unit is rented at £24,000 a year. New accommodation for Customer Services will be rented at £12,000 a year. Running expenses for the Matdaad accommodation is expected to be around £2,800 a month. Finance-IT Ltd will buy equipment for use by the consultants on 1 January 2010, with an estimated price of £500,000. At the end of the consultancy contract the equipment will be sold for about £10,000.
  • Once the software is ready for use, Gordon assumes it will be used in its first form for three years, after which a new product will be developed to replace it. The new product would reflect changing patterns of banking and customers needs.
  • A dedicated team of experts will deliver repair and maintenance service for the software. The team will be formed from the existing pool of employees and will use premises and equipment already owned by Finance-IT Ltd. The annual cost, including accommodation and running costs, will be £120,000 with £10,000 extra expenses for the project. Half the work currently done by the dedicated team would be discontinued (with the firm losing of £250,000 fee income in 2010 only) and the rest reallocated to other existing staff.
  • Gordon is considering a three tier pricing policy:
    • An initial charge of £100,000 per customer for installing the software and a further £50,000 for the upgrade. These payments would also cover repairs and maintenance of the software for the first year of use.
    • A charge of £1 per customer per year tracked by the software. The charge, payable in advance, is based on a price of 0.2p per data item and an assumption that for each customer an average of 500 data items per year would be accessed. Assume this is earned pro-rata over time.
    • A charge of £1 per customer whose data triggers an offer of a bank product
  • At a very rough estimate Gordon predicts sales in the first year as:
    • Banks and their potential customers

§  Standard Level only - 8 banks with 1.3m customers

§  Standard Level with Premier Level upgrade - 12 banks with 2.5m customers. 9 banks with 1.4m customers predicted to take upgrade.

§  All this plus predictions for later years in Appendix.

o   He assumes customers for 2010 will buy the software as soon as it is available and in later years will buy on 1 January.

o   He also predicts that in each year the premier software is being used 40% of customers will be offered bank products

  • Additional costs of marketing will be an initial £100,000 at the start of 2010 plus £2,000 a month for the three-year life of the project.
  • Finance-IT Ltd pays UK corporation tax at 28% and does not expect this project to attract any capital allowances. Gordon has asked for the pre-tax cash flow on the grounds that as there are no capital allowances tax is not an issue in deciding whether to go forward with the project.
  • Capital projects are currently assessed using 4% cost of capital. The rate is based on current borrowing but Finance-IT, which is very highly geared, needs to refinance most of its loans on 1 January 2010 and expects to pay about 10% for the new money.
Posted Date: 2/22/2013 7:23:47 AM | Location : United States







Related Discussions:- Costs and revenue, Assignment Help, Ask Question on Costs and revenue, Get Answer, Expert's Help, Costs and revenue Discussions

Write discussion on Costs and revenue
Your posts are moderated
Related Questions
On May 9th, David paid $34,500 (including sales tax) to purchase a used Audi A8 that he uses 90% of the time for business. No trade-in was involved. David uses the actual operating

10) Mike Taylor, the owner of Tennessee River Boat Rentals, is estimating the cost of operating his boat rental company next year. He expects to have 450 rentals during 200Z. The f

Discuss the advantages and disadvantages of designing an IC using VHDL and synthesis compared with the traditional design approach using schematic capture, simulation and layout.

Absorption Costing The process described in this section by that net overheads are absorbed into production naturally enough is identified as absorption costing.  The absorpti

Ask What is the major value of the weighted cost of capital calculation for the firm? question #Minimum 100 words accepted#

Purposes of Overhead Cost Analysis There are a number of situations whether the analysis of overhead costs will assist in the satisfactory evaluation of the relevant cost data

All  transfer-pricing  methods  give  the  similar division  operating  income.  Do  you  agree? Describe.

Single Limiting Factor Where a single limiting factor exists for the decision making sequence may be implemented given as:- - Compute the contribution per unit of limiting

The credit term from the supplier is 2/30, net 60. Requirements: Write the calculation Determine the effective annual rate if the firm does not take the discount.

Brandywine Homecare, a not-for-profit business, had revenues of $12 million in 2011. Expenses other than depreciation totaled 75 percent of revenues, and depreciation expense was $