Management Accounting

This question is about decision making, outsourcing and relevant cost which is an important area to understand for any Management accounting student.

You have a friend, a builder, who has two contracts for renovation, at konozz ltd and Vangavanga plc.  These contracts are mutually exclusive as they are both due to start at present.

The calculated profits on these contracts are:

                                                            Konozz ltd        Vangavanga Plc
                                                            £000                   £000
Contract price                                       26.4                    28.0
In stock                                                3.0                        4.0
Ordered                                                0.8                        2.0
Not yet ordered                                     6.6                        5.6

Supervisory                                          2.0                        2.0
Skilled                                                 4.4                        2.8
Unskilled                                              4.0                        4.0

Office costs (allocated)                         0.8                        1.2

Plant depreciation                                 1.0                        1.6

Notional interest on capital used            0.4                        0.8

Other costs (apportioned)                      1.0                        1.0

Total Cost                                             24.0                      25.0 

Profit:                                                   2.4                        3.0

Additional information:

Cancellation penalties are £2,000 for Konozz Ltd and £2,400 for Vangavanga Plc.

Materials in stock for Konozz Ltd would now cost 40% more if purchased, but if not used on the contract would be resold at 12% less than current value as they have no other use.

Materials in stock and ordered for Vangavanga Plc have a resale value of 10% of cost and are specific.  With the hire of a machine for £200, the materials can be converted for resale at 80% of their current cost.

Local unskilled labour can be hired at Konozz Ltd, but at Vangavanga Plc the cost will be 30% greater due to shortages. All other labout is already employed on long term contracts
Plant is depreciated on a straight line basis.  Last estimates of their real fall in value are £400 and £1,400 at Konozz and Vangavanga respectively.

Your friend could sub contract the plant not required at Vangavanga Plc for £3,000 income in the period in question.


Present the information to the builder in a form that will assist the making of the decision as to which contract to undertake.

                                                            Konozz Ltd                                Vangavanga Plc
Sales                                                    26.4                                          28.0

Stock Ordered                          4.4                                            4.6
To be Ordered                           6.6                                            5.6

Labour unskilled                        4.0                                            5.2

Depreciation                             0.4                                            1.4
Plant opportunity cost                                                               3.0
Penalty                                     2.4                                            2.0
                                                            17.8                                          21.8
Profit                                                     8.6                                             6.2

Konozz Ltd
In stock  3.0 + 40% = 4.2 ) 5.0 - 12% = 4.4
Ordered                      0.8)

Vangavanga Plc
In stock  4.0 ) 6.0 x 10% -- 0.6
Ordered 2.0)
Or (6.0x8%) - 0.2                 --4.6

All labour except unskilled seems to be employed anyway.
Calder 4.0 + 30% = 5.2

Depreciation specific to this contract is relevant.

Plant subcontract is opportunity  cost to Vangavanga Plc.

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