able to operate at full capacity and are currently incurring losses due to a decision to not lay off any permanent staff members.

A Request to Bid has been sent by WaterBlue, an NGO, to a number of environmental consultants to undertake an analysis of a river pollution spill by Smokestack Ltd and compile a report for public comment. WaterBlue has made it clear that being an NGO, they cannot afford more than R250 000, but given the public scrutiny, they expect a comprehensive report based on full testing. Competition for the bid is expected to be fierce as this will be a high-profile case.

A preliminary costing has been undertaken and the firms lead consultant has indicated that it is not worthwhile to proceed. Even though it will give us a good profile, it will just compound our losses. In addition, the Internal Consultant has a short-term contract of 20 hours for CapeBees at our full fee of R2,500 per hour, which would have to run concurrently with WaterBlue and cannot be delayed or postponed.

The analysis has been prepared as follows:

Note	ESG: Request to Bid fee for NGO
1	Internal Consultant	100 hours @ R1,000 per hour	R100,000
2	Outside consultant	20 hours @ R1,500 per hour	R30,000
3	Recovery on laboratory fixed cost	20 hours @ R500 per hour	R10,000
4	Acquisition of safety wear	2 consultants @ R15,000 each	R30,000
5	Boat hire	R5,000 per day for 5 days	R25,000
6	Chemicals	Acquired in 2019, still suitable	R40,000
7	Variable overheads	120 hours @ R50 per hour	R6,000
8	Fixed Overheads	120 hours @ R800 per hour	R96,000
	Total		R337,000
9	Normal Mark-Up	25%	R84,250
	ESG Bid Price		R421,250
	Required Bid Price		R250,000
	Loss		R171,250

Notes to the above:

1. The Internal Consultant is a permanent full-time staff member who continues to earn full salary. The short contract for CapeBees (20 hours at R2,500 per hour) is not included in the above analysis.
2. The outside consultant is an independent, self-employed consultant who brings a specialist skill set required for the pollution spill project.
3. ESG has its own on-site laboratory, which was built five years ago. Every project which requires its services is charged a fixed recovery rate.
4. As the pollution spill is potentially hazardous, safety wear will be required for both consultants. These will be disposed of after the pollution spill has been analysed.
5. ESG will need to hire a boat to gather samples.

6. The chemicals were acquired in 2019 for R40,000. It was deemed fortuitous that this project would proceed as ESG has no other use for them. An offer has been made by another company to acquire the chemicals for R5,000.
7. Variable overheads are incurred at a chargeable rate of R50 per hour. The 120 hours comprises the total time of both the Internal and External Consultant.
8. Fixed overheads are incurred at a chargeable rate of R800 per hour. The 120 hours comprises the total time of both the Internal and External Consultant. The fixed overhead rate is calculated according to normal activity and hence includes all consultant activities irrespective of whether they are Internal or External.
9. The mark-up of 25% is deemed to be a reasonable return, given that it is normally 40%.

QUESTIONS:

1. Apply the decision relevant approach to justify your reason for inclusion / exclusion of EACH cost item in the minimum price analysis.

2. Calculate the minimum price ESG (Pty) Ltd should charge for undertaking the river pollution spill project on behalf of WaterBlue.

3. Explain how your decision would change if ESG (Pty) Ltd was working at full capacity. [3 minutes]

4. Outline relevant qualitative factors that need to be considered. [6 minutes]

5. Finally, consider the decision to be made under the following scenario:

The internal consultant has been telephoned by the Smokestack Ltd who has said they will pay R600 000 if ESG undertakes the pollution spill analysis for Smokestack. The reason given is that WaterBlue will do everything in their power to tarnish the reputation of Smokestack Ltd and hence the latter want a proper assessment done by credible environmental consultants. [Note: this scenario is to be dealt with separately from the qualitative analysis above]