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

Why communities begin using fca, Q. Why communities begin using FCA? Th...

Q. Why communities begin using FCA? There are several reasons why communities start by means of FCA. For instance: • To elucidate more evidently MSW costs to people. • It is

Determine controllable margin and total contribution, Phelps Glass Inc. has...

Phelps Glass Inc. has reported the following financial data: net revenues of $10 million, variable costs of $5 million, controllable, fixed costs of $2 million, non-controllable fi

Time rate system - labour remuneration, Time Rate System - Labour Remunerat...

Time Rate System - Labour Remuneration It may be a high day rate or a flat time rate. Under flat time rate, all worker is paid for the time spend without considering the vol

Cost benefit approach - terms used in cost accounting, Cost Benefit Approac...

Cost Benefit Approach - Terms Used in Cost Accounting Is the primary criterion for selecting with alternative accounting approaches? There is a direct relationship in a co

Gains and losses on disposal, When assets are replaced during the anticipat...

When assets are replaced during the anticipated life of the project, or at the end of the anticipated life of the project, they are sold at their pre-determined scrap values. Incom

Calculate the total transportation cost, The sunshine tomato soup shippers ...

The sunshine tomato soup shippers produce tomato soup at three west coast canneries in Bakersfield, phoenix, and Eugene. The soup is shipped to four regional warehouses. Due to hig

High - low method of cost estimation, High - Low Method of Cost Estimation ...

High - Low Method of Cost Estimation Now, cost estimation is based upon the relationship between past level and past cost of activity. Variable cost is based on the relationsh

Find the weighted average cost of capital, PrivateJets (PJ) is considering ...

PrivateJets (PJ) is considering expanding its operations in the corporate travel market. Currently, PJ has a capital structure with a 25% debt-equity ratio. Their levered equity

Tracking direct materials, Tracking Direct Materials Jack keeps full re...

Tracking Direct Materials Jack keeps full records of the material released to each job. When Donnie gathered up light bulbs, tape, breakers, wire, and wire nuts on the morning

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