Costs and revenue, Cost Accounting

Assignment Help:

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.

Related Discussions:- Costs and revenue

Calculate the nonvalue-added cost per unit, Question Roseville, Ltd., s...

Question Roseville, Ltd., sells one of its products for $500 each. Sales volume averages 1,000 units per year. Recently, its main competitor priced their competing product at 1

Types of overhead absorption rate, Types of Overhead Absorption Rate ...

Types of Overhead Absorption Rate NB: Overheads incurred are generally absorbed on the basis of budgeted or estimated figures. The given basis may be applied leading to the

Internal sources of funds, While we are looking for sources funds it is oth...

While we are looking for sources funds it is other than natural to start searching from home. What do we have? During examining the requirement for working capital we could also ma

Determine the amount of depreciation expense, Waylander Coatings Company pu...

Waylander Coatings Company purchased waterproofing equipment on January 6, 2013, for $320,000.The equipment was expected to have a useful life of four years, or 20,000 operating ho

Relevance of interdependence , Describe the meaning and relevance of interd...

Describe the meaning and relevance of interdependence of variances when reporting to managers.

Find the total amount of product costs, for financial accounting purposes, ...

for financial accounting purposes, what is the total amount of product costs incurred to make 10,000 units?

Calculate- total variable cost and average variable cost, The firm currentl...

The firm currently uses 50,000 workers to produce 200,000 units of output per day. The daily wage per worker is $80, and the price of the firm’s output is $25. The cost of other va

Applications of funds, Requirement for additional Funds A business would...

Requirement for additional Funds A business would require additional capital for two purposes: 1. Financing additional fixed assets, and

Methods of costing, METHODS OF COSTING : 1. Job costing :  Job costing ...

METHODS OF COSTING : 1. Job costing :  Job costing is the essential costing technique appropriate to those industries somewhere the work consist of separate contracts, or batch

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd