23 Mar Trinco Ltd (Trinidad & Tobago-T&T) has been negoti
Trinco Ltd (Trinidad & Tobago-T&T) has been negotiating a contract with a potential customer in Jamaica. Before the negotiations started the Jamaican company agreed to pay $10,000 in advance to cover the expenses of Trinco. These expenses were to cover the costs of sending out technical staff to Jamaica. This is the first export order the company has received since 1988. Unfortunately, the previous export orders were not profitable and managers decided the best strategy was to concentrate on business in T&T.The sales department has prepared a statement showing that the contract will make a profit. It is normal for the sales department to prepare cost estimates as they have a lot of experience of this type of work.Occasionally the management accountant will also be asked to comment on the estimates prepared by the sales department. As this order is different and may lead to a lot more business in the future the senior managers asked the management accountant to comment on the statement, shown below.Statement prepared by sales department$Sales – including deposit of $20,000 (see note 1)250,000Labour (see note 2) 85,000Supervisor (see note 3) 15,000Design overheads (see note 4) 2,000Administrative charge (see note 5) 25,000Materials (see note 6) 110,000Depreciation on machinery (see note 7) 5,000Profit $8,000After her investigation the management accountant prepared a brief report. The mainpoints are summarised below.Comments from management accountantNote 1 The deposit will not have to be refunded.Note 2 The labour costs include $15,000 of costs for work that has alreadybeen incurred. This is the cost of sending engineers to Jamaica to helpwith the negotiations.Note 3 This is 50% of the cost of a supervisor. It is estimated that thesupervisor will spend about half his time on the contract. This costdoes not include a $2,000 bonus for the supervisor if the contract is completed on time.Note 4 These costs have already been incurred.Note 5 This charge is equal to 10% of sales. This is levied on all contracts to cover general administrative costs.Note 6 Materials40,000kg of material X at $1.5 per kg = $60,00020,000kg of material Y at $2.50 per kg = $50,000Material X is used regularly by the company. There is 20,000kg in stock but the market price has just increased to $2 per kg.Material Y is never used by the company. There is 30,000kg in stock that cost $2.50 per kg. To buy it today would cost $4 per kg. An alternative choice for the company is to sell it for scrap at $2.10 per kg.Note 7 Depreciation has been calculated at $5,000. However the management accountant discovers that this charge is for a machine that is currently not used. The management accountant has received an offer of $100,000 for the machine now but if the project goes ahead it will only be sold for $50,000 at the end of the project.Additional informationThe statement above does not include the cost of additional training if the contractgoes ahead. The cost of the training has been estimated at $10,000.Question 1Advise managers whether or not this contract is profitable. All assumptions must be clearly stated.Question 2Identify and evaluate any additional information that managers need to consider before accepting or rejecting this contract( Source: Adaptation from McGraw-Hill )
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