Page 77 - P1 Integrated Workbook STUDENT 2018

Relevant costs and decision making

Example 1

Robson has produced a made-to-order product for a customer at a cost of
$50,000, which was to have been sold to the customer for $120,000. The
customer has now gone bankrupt. Robson has commissioned a consultant to
determine whether another use for the product could be found. The
consultant’s fee is $4,000 which is due for payment in 2 weeks’ time.

The consultant has determined that Robson has the option of converting the
product into a different version which it estimates could be sold for $85,000.
The conversion would require the following:

 1,000 kgs of material A. The company currently has 2,500 kgs in stock
which was bought last month for $2.00 per kg, although the current
purchase price has now increased to $2.15. Material A is regularly used
in the company's other products.

 2,000 kgs of Material B. The company currently has 600 kgs in stock
which was bought last month for $3.00 per kg although the current
purchase price is now $3.50. There is no other use for the material and it
has a scrap value of $1.00 per kg.

 4,000 hours of skilled labour. Skilled labour is paid a fixed weekly wage
and there is currently spare capacity sufficient to provide half the
required hours. The remaining hours would be made up through
overtime which would be paid at $12 per hour.

 3,000 hours of semi-skilled labour. Semi-skilled labour is paid at $6 per
hour but is currently fully occupied on other projects. Due to union
restrictions, staff will not work overtime and there is no other labour
available at such short notice. Therefore the only way to get the required
hours is to move staff from other production. Each hour used on this
other production currently generates contribution of $4 per hour (being
revenue of $25, material cost of $15 and labour of $6).

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