Taku-Tau (Pty) Ltd has been offered a contract which, if accepted, would significantly increase next year's activity levels. The contract requires the production of 20 tons of product XX and specifies acontract price of NS100 per kg. The resources used in the production of each kg of XX include:Resource per kg of xxCost per hourLabour.Grade 12 hoursN$4Grade 26 hoursNS2.5Material:A2 unitsB1 litreGrade 1 labour is highly-skilled and is currently under-utilized in the firm. It is Taku-Tau's policy to continue to pay Grade labour in ful. Acceptance of the contract would reduce the idle time of Grade1 labour. Idle time payment is treated as non-production overheads.Grade 2 is unskilled labour, with a high turnover, and may be considered a variable cost.The materials required to fulfil the contract would be drawn from those materials already in stock. Material A is widely used within the firm regularly. Material B was purchased to fulfil an expectedorder which was not received; if material B is not used for the contract, it will be sold. For accounting purposes, FIFO is used. The various values and costs for material A and B are:AB(NS) per unit(N$) per unitCarying valueReplacement cost8301132Net realizable value25A single recovery rate for fixed factory overheads is used throughout the firm, even though some fixed production overheads could be attributed to single products or departments. The overhead isrecovered per productive labour hour, and initial estimates of next year's activity, which excludes the contract, show fixed production overheads to be NS600 000, with productive labour hours of 300000. Acceptance of the contract would increase fixed production overheads by NS228 000. Variable production overheads are accurately estimated at NS3.50 per productive labour hour on allproducts.Acceptance of the contract would be expected to encroach on the sales and production of another product YY, which is also made by Taku-Tau. It is estimated that sales of YY would then decreaseby 4 000 units in the next year only. However, this forecast reduction in sales of YY would enable fixed factory overheads of NS58 000 to be avoided. Information on YY is as follows:Per unitSalesNS70Labour- Grade 24 hoursMaterials-relevant variable costsN$12Required: Calculate the relevant variable cost related to the contract.NB: You are not required to enter the unit or currency symbol.Enter a numerical answer with no space. For example: 1000

SOLUTION: Computation of opportunity cost

Answered: by 4 000 units in the next year only.…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 21P

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