Little help with management accounting exam question

lightspeed

hi im studying a part time business and law degree and next month i have to sit a management accounting exam in which im not fully prepared for. the main difficulty im having is that although i can view past exam papers, the college lecturer has not thought it necesscary to put up the solutions. Im usimg several books but some of the questions differ from the examples in the textbook. Can anybody help advise me of how to start the below question which is a sample question of a previous exam.

[FONT=Times New Roman, serif]Question
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[FONT=Times New Roman, serif]You are the management accountant of an engineering company.[/FONT]
[FONT=Times New Roman, serif]One of your customers has requested a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. A junior member of your staff, in conjunction with the production manager, has already prepared the following cost estimate:[/FONT]
[FONT=Times New Roman, serif]Notes[/FONT][FONT=Times New Roman, serif] €[/FONT]
[FONT=Times New Roman, serif]Direct materials:[/FONT]
[FONT=Times New Roman, serif]Material X . 50 kg at €150 per kg (book value) (1) 7,500[/FONT]
[FONT=Times New Roman, serif]Material Y . 40 kg at €80 per kg (book value) (2) 3,200 [/FONT]
[FONT=Times New Roman, serif]Direct labour: [/FONT]
[FONT=Times New Roman, serif]Skilled . 32 hours at €50 per hour (3) 1,600[/FONT]
[FONT=Times New Roman, serif]Unskilled . 10 hours at €10 per hour (4) 100 [/FONT]
[FONT=Times New Roman, serif]Variable overhead .[/FONT][FONT=Times New Roman, serif] 25 hours at €12 per hour (5) 300[/FONT]
[FONT=Times New Roman, serif]Depreciation - Machine C[/FONT][FONT=Times New Roman, serif] . 25 hours at €3 per hour (6) 75[/FONT]
[FONT=Times New Roman, serif]Estimating [/FONT][FONT=Times New Roman, serif] (7) [/FONT][FONT=Times New Roman, serif]150[/FONT]
[FONT=Times New Roman, serif]12.925[/FONT]
[FONT=Times New Roman, serif]Notes[/FONT]

[FONT=Times New Roman, serif](1) The company currently has [/FONT][FONT=Times New Roman, serif]Material X in stock and the above was the cost. There is now no other use for material X, other than the above project, within the factory and it would cost €1,750 to dispose of. [/FONT]


[FONT=Times New Roman, serif](2) Material Y is in regular use. Any stock utilized on this order would have to be replaced at the current replacement cost of € 85 per kg.
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[FONT=Times New Roman, serif](3) Skilled labour is in short supply. In order to accommodate the completion of this order, all the skilled labour time required would be worked as overtime. Skilled workers earn an overtime premium of 30% in addition to the normal hourly rate of € [/FONT][FONT=Times New Roman, serif]50.[/FONT]

[FONT=Times New Roman, serif](4) There is currently sufficient paid idle time in respect of unskilled labour to be able to complete this order.
[/FONT]

[FONT=Times New Roman, serif](5) Variable overhead represents the operating costs of the machinery to be used.
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[FONT=Times New Roman, serif](6) When not in use by the company, Machine C is hired to outside companies at [/FONT][FONT=Times New Roman, serif]€ [/FONT][FONT=Times New Roman, serif]30 per hour. All operating costs are borne by the customer hiring the machine. There is strong market demand for this facility.
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[FONT=Times New Roman, serif](7) The cost of the estimating time is that attributed to the three hours spent preparing the estimate.
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[FONT=Times New Roman, serif]Requirement[/FONT]
[FONT=Times New Roman, serif](a) Prepare a revised cost estimate using relevant costing, showing clearly the minimum price that the company should accept for the order [clearly state how you have arrived at your figures]. [/FONT][FONT=Times New Roman, serif] [[/FONT][FONT=Times New Roman, serif]19 marks][/FONT]


[FONT=Times New Roman, serif]Can anybody please advise of what i do first? As i have a better idea of decision making questions that involve whether or not you should take an order but this question asks for the minimum price which is somewhat different.
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[FONT=Times New Roman, serif]Regards[/FONT]
[FONT=Times New Roman, serif]Andrew
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hivizman

If you can do questions that involve deciding whether or not to accept an order, where the price relating to the order is given, you can do this question. The only difference is that you are not given a price for the order, but must determine the price. However, the logic underlying the use of relevant costs (sometimes referred to as incremental, marginal or opportunity costs) is that a business should accept an incremental order only if the revenues from accepting the order are at least equal to (and ideally more than) the additional net costs that would be incurred by accepting the order.

So the minimum price that would be acceptable is equal to the total of the relevant net costs.

Work through the various items in the costing statement and work out what the relevant cost should be. For example, Material X is something that, if it's not used on the proposed contract, would have to be disposed of at a cost of €1,750. So using the material on the contract would actually save the business €1,750, so this would be treated as a "negative cost". The original cost of the material is irrelevant - it's already been spent and hence is a "sunk cost".