60.1K

Verified Solution

Link Copied!

Cell Co (C Co) is a company specialising in the provision of telephone systems for commercial clients. There are two parts to the business:

1. installing telephone systems in businesses, either first time installations or replacement installations;
2. supporting the telephone systems with annually renewable maintenance contracts.

C Co has been approached by a potential customer, Pull Co, who wants to install a telephone system in new offices that it is opening. Whilst the job is not a particularly large one, C Co is hopeful of future business in the form of replacement systems and support contracts for Pull Co. C Co is therefore keen to quote a competitive price for the job.

Thefollowing information should be considered:

1. One of the companys sales representatives has already been to visit Pull Co, to give them a demonstration of the new system, together with a complimentary lunch, the costs of which totaled 400.

2. The installation is expected to take one week to complete and would require three engineers, each of whom is paid a monthly salary of 4,000. The engineers have just had their annually renewable contract renewed with C Co. One of the three engineers has spare capacity to complete the work, but the other two would have to be moved from contract X in order to complete this one. Contract X generates a contribution of 5 per engineer hour.There are no other engineers available to continue with Contract X if these two engineers are taken off the job.It would mean that C Co would miss its contractual completion deadline on Contract X by one week. As a result,C Co would have to pay a one-off penalty of 500. Since there is no other work scheduled for their engineers in one weeks time, it will not be a problem for them to complete Contract X at this point.

3. C Cos technical advisor would also need to dedicate eight hours of his time to the job. He is working at fullcapacity, so he would have to work overtime in order to do this. He is paid an hourly rate of 40 and is paid forall overtime at a premium of 50% above his usual hourly rate.

4. Two visits would need to be made by the site inspector to approve the completed work. He is an independentcontractor who is not employed by C Co, and charges Pull Co directly for the work. His cost is 200 for eachvisit made.

5. C Cos system trainer would need to spend one day at Pull Co delivering training. He is paid a monthly salaryof $1,500 but also receives commission of 125 for each day spent delivering training at a clients site.

6. 120 telephone handsets would need to be supplied to Pull Co. The current cost of these is 1820 each,although C Co already has 80 handsets in inventory. These were bought at a price of 1680 each. The handsetsare the most popular model on the market and frequently requested by C Cos customers.

7. Pull Co would also need a computerised control system called Swipe 2. The current market price of Swipe 2is 10,800, although C Co has an older version of the system, Swipe 1, in inventory, which could be modifiedat a cost of 4,600. C Co paid 5,400 for Swipe 1 when it ordered it in error two months ago and has no otheruse for it. The current market price of Swipe 1 is 5,450, although if C Co tried to sell the one they have, it wouldbe deemed to be used and therefore only worth 3,000.

8. 1,000 metres of cable would be required to wire up the system. The cable is used frequently by C Co and it has200 metres in inventory, which cost 120 per metre. The current market price for the cable is 130 per metre.

9. You should assume that there are four weeks in each month and that the standard working week is 40 hourslong.

Cell Co has a subsidiary Mobile Co (M Co) which is engaged in the manufacture of handsets for businesses based in Ireland. The chief financial officer has obtained the following figures and has asked for a cash budget to be produced for the six months ending 30^th June 2019.

1. The selling price of the companys only product is 37.
2. Quantities sold (in units) on credit will be as follows:

Nov.	Dec.	Jan.	Feb.	Mar.	Apr.	May	Jun.
1,000	1,200	1,400	1,600	1,800	2,000	2,200	2,600

3. Credit sales customers are given twomonths to pay their bills.
4. There are no cash sales.
5. The production cost of the companys product is 23 made up as follows:

Materials 16 Labour 5 Variable Overhead 2

6. Production quantities (in units) are as follows:

Nov.	Dec.	Jan.	Feb.	Mar.	Apr.	May	Jun.
1,200	1,400	1,600	2,000	2,400	2,600	2,400	2,200

7. Materials are paid for twomonths after they have been purchased.
8. Labour is paid in the same month as it is incurred.
9. Variable overheads are paid in the month it is incurred.
10. A bank Loan of 25,000 is to be repaid in April 2019.
11. A vehicle which will be bought in January 2019 for 8,000 is to be paid for in April 2019.
12. Fixed costs are 3,000 per month.
13. Mobile Co is expected to be 12,500 overdrawn in the bank at 1^st January 2019.

The managing director of M Co has argued that there is continuing pressure to control costs and maintain efficiency and that the time has come to move away from Incremental budgeting and embrace Zero based budgeting as the budgeting system. He has stated that there is no longer a place for incremental budgeting in any organization and that Zero Based Budgeting is far more suitable.

Requirements:

1. Prepare a cost statement, using relevant costing principles, showing the minimum cost that C Co should charge for the contract. Make detailed notes showing how each cost has been arrived at and explain why each of the costs above has been included or excluded from your cost statement.

2. Explain the principles and reasoning of relevant costing principles in the context of decision making.

3. Construct a cash budget for Mobile Co for the six month period January to June 2019, showing clearly the cash at bank position at the end of each month (include a total column).

4. Comment on your results and suggest three ways in which Mobile Co could improve the cash situation going forward.

5. Identify and discuss the factors that need to be considered when implementing a system of zero based budgeting as opposed to incremental budgeting.

Answer & Explanation Solved by verified expert

See Answer