Page 409 - PM Integrated Workbook 2018-19

Answers

Profit

 This is Mr Smith’s minimum profit margin which he believes is necessary
to cover ‘general day-to-day expenses of running a business’.

Calculate and explain for Mr Smith what you believe the minimum tender
price should be.

$
Material A (note 1): 1,000 kgs @ $2 – $300 per kg 1,700

1,000 kgs @ $10 10,000
11,700

Material B (note 2): 1,000 kgs @ $15 15,000
Material C (note 3): 500 kgs – opportunity cost 8,000

Material D (note 4): 50 litres @ $50 (2,500)
Skilled labour (note 5) 1,000 hours @ $25 25,000

Semi-skilled labour 500 hours @ $22.50 11,250
(note 6)
Unskilled labour (note 7) 500 hours @ $12 (opportunity
cost) 6,000
Minimum tender price = total of relevant cash flows 74,450

Notes

(1) There are 1,000 kgs in stock and these will not be replaced. These would
otherwise be sold at a net gain of $1,700. This gain is therefore foregone
as a result of using this material in the contract.

The other 1,000 kgs are out of stock and therefore the relevant cost is
the current purchase price of $10 per kg.

(2) The material is in stock but will be replaced and therefore the relevant
cost is the current purchase price of $15 per kg.

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