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Homework answers / question archive / Question text Walitato (Pty) Ltd has been offered a contract which, if accepted, would significantly increase next year's activity levels

Question text Walitato (Pty) Ltd has been offered a contract which, if accepted, would significantly increase next year's activity levels

Accounting

Question text Walitato (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 a contract price of N$100 per kg. The resources used in the production of each kg of XX include: Resource per kg of xx Cost per hour N$4 Labour: Grade 1 2 hours Grade 2 6 hours NS2 Material: A 2 units IB 1 litre Grade 1 labour is highly-skilled and is currently under-utilised in the firm. It is Walitato's policy to continue to pay Grade labour in full. Acceptance of the contract would reduce the idle time of Grade 1 labour. Idle time payment is treated as non-production overheads. Grade 2 is unskilled labour, with a high turnover, and may be considered a variable cost. The materials required to fulfil the contract would be drawn from those materials already in stock. Material A is widely used within the firm regularly. Material B was purchased to fulfil an expected order which was not received; if material B is not used for the contract it will be sold. For accounting purposes, FIFO is used. The various values and costs for material A and B are: A B (N$) per unit (N$) per unit 8 30 Carrying value Replacement cost 10 32 Net realizable value 9 25 A 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 is recovered per productive labour hour, and initial estimates of next year's activity, which excludes the contract, show fixed production overheads to be N$600 000, with productive labour hours of 300 000. Acceptance of the contract would increase fixed production overheads by N$228 000. Variable production overheads are accurately estimated at N$3 per productive labour hour on all products. Acceptance of the contract would be expected to encroach on the sales and production of another product YY, which is also made by Walitato. It is estimated that sales of YY would then decrease by 5 000 units in the next year only. However, this forecast reduction in sales of YY would enable fixed factory overheads of N$58 000 to be avoided. Information on YY is as follows: Per unit Sales N$70 Labour- Grade 2 4 hours Materials-relevant variable costs N$12

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