Prepare statement showing the relevant costs of the project

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Reference no: EM132824010

KRAFTWORK LIMITED

Kraftwork Limited has been asked to provide a quotation for an engineering project that will take one year to complete. An analysis of the project has already been completed and the following resource requirements have been identified:

1) A specialised machine will be required for a total of 10 weeks. Two of these weeks are at the start of the project and three of them are at the end. The machine could be hired in for £4,000 per week from a reputable supplier who would guarantee its availability when the machine is required. Alternatively the machine could be purchased at a cost of £250,000. If purchased, the machine could be sold in one year's time for £150,000. In addition, if purchased then the machine could be hired out to other companies when not in use by Kraftwork Limited; the hire out charge would be £2,500 per week and it is believed that the machine could be hired out for a total of 30 weeks.

2) The machinery has a running cost of £720 per week. The cost is incurred by the user of the machine.

3) It is company policy to depreciate non-current assets by 25% per annum on a reducing balance basis.

4) Skilled labour would be required for a total of 9,000 hours during the year. The labour required could be recruited at an hourly rate of £12. Alternatively some employees who are currently working on other projects within the company could be transferred to this project; the current hourly rate for these workers is £10. If transferred, these employees would need to be replaced on their current projects. Replacements for the existing project work would cost £11 per hour.

5) Unskilled labour would be required for a total of 12,000 hours during the year. These unskilled labourers would need to be recruited on a one-year contract at a cost of £8 per hour.

6) The project would need to be supervised and it is estimated that there would be a total of 500 hours of supervision required during the year. One of the company's existing supervisors could undertake this work but if she did so she would have to work a total of 300 hours overtime during the year to carry out supervision on the new project as well as continuing with her current duties. The supervisor earns a salary of £50,000 per year for working 2,000 hours and is not paid for overtime work. If the project goes ahead the supervisor will be paid a bonus of £5,000.

7) The direct materials required for the project are as follows:

i. Carbo-Ray 44: the total amount required for this project would have to be purchased at a cost of £15,000.

ii. Dax BP: the total amount required for this project would be 10,000m². Two years ago the company purchased 25,000m² of this material for £100,000 for a different project. The earlier project used 20,000m² of the material and the remainder is currently held in inventory. The company does not foresee any further use for this material in the future and it could be sold for £2 per m². The current purchase price of the material is £5 per m².

8) The company has incurred expenditure of £25,000 to date in analysing the resource requirements of the proposed project.

9) It is company policy to attribute overhead costs to projects using an absorption rate of 40% of prime costs.

10) It is company policy to add a 25% mark-up to total costs in order to price projects.

Requirements:

Problem (a) Prepare statement showing the relevant costs of the project. For each of the items (1) to (10) you must clearly explain the reason for your treatment of the item.

Reference no: EM132824010

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