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Martin Krongan Ltd (MK) makes specialist machinery to customers specifications. The estimating department of the business has produced the following information relating to the new contract:

Material A. The required quantity is held in inventories. This cost 6,000 when it was bought. It would cost 6,400 to replace it. The material is hazardous and would cost the business 1,000 to scrap it. The business uses it constantly.

Material B. By coincidence the appropriate quantity of this material was ordered nine months ago for another contract that was subsequently abandoned because the material was not delivered in time. MK does not normally use this material and its scrap value is 4,000. The original cost price was agreed at 10,000. The current market buying price is now 7,000.

Material C. 30 units of this material will be required. Material is normally held in inventories as it is widely used throughout the businesss product range. There are 15 components currently in inventories. These had cost 1,800 each. The sole supplier of this component has announced an immediate price rise of 5% for further purchases.

Labour. 50 hours of labour will be required for the production. Labour is a fixed cost to MK, because members of staff are paid in full the normal 12 an hour whether there is work for them to do or not. 20 hours, of the required 50 hours, can be provided by members of staff who currently have no work to do. Only taking staff off other work can provide the remaining 30 hours. This other work is charged out to customers at 30 an hour.

Required

1. Define the terms cost and relevant costs and describe the type of costs that relevant costs may include.

2. Show, (calculate) the minimum price that MK could undertake the contract such that it would be neither better nor worse off as a result of undertaking it?

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