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

Financially acceptable, Suppose that you are the chief financial officer at...

Suppose that you are the chief financial officer at Porter Memorial Hospital.  The CEO has asked you to analyze two proposed capital investment-Project X and Project Y.  Every proj

explain your calculation of relevant net cash flows, Polycorp Limited Stee...

Polycorp Limited Steel Division is considering a proposal to purchase a new machine to manufacture a new product for a potential three year contract.  The new machine will cost $1

Purpose, what are the purposes of cost accounting

what are the purposes of cost accounting

What is the total cost of the work in process, The Cutting Department of th...

The Cutting Department of the Rock Island Custom Cabinetry Corporation (a process costing production) had no work in process at the beginning of the period, 12,000 units were compl

Purpose of cost accounting, what is the purpose of cost accounting and its ...

what is the purpose of cost accounting and its nat ure?

Inventory systems, Find a journal article online about just-in-time invento...

Find a journal article online about just-in-time inventory systems. In the subject line of your post, include the title of the article that you read. Post a link to that article wi

What is the probability that a randomly selected bike, A bicycle plant runs...

A bicycle plant runs two assembly lines, A and B. 96.9% of line A's products pass instruction, while only 93.8% of line B's products pass inspection. 70% of the factory's bikes com

Long - term capital loss, The Smiths have a long-term capital loss carryove...

The Smiths have a long-term capital loss carryover of $10,000 from 2010. On May 9, 2007, David's uncle, Joe, gave him the family antique gun collection. Based on family records

What is the marginal cost, Marginal Cost (MC): The marginal cost of an a...

Marginal Cost (MC): The marginal cost of an additional unit of output is the cost of the additional inputs required to make that output. More formally, the marginal cost is the

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