Ican 2025 Performance Management Question 1

A company has been asked to provide a quotation for an engineering project that will take one year to complete. An analysis of the project has already been completed and the following resource requirements have been identified: (i) A specialised machine will be required for a total of 10 weeks. Two of these weeks are at the start of the project and three of them are at the end. The machine could be hired from a reputable supplier, who would guarantee its availability when it is required, for ₦40,000 per week. Alternatively it could be purchased at a cost of ₦2,500,000. If it was purchased, it could be sold in one year’s time for ₦1,500,000. If the machine was purchased, it could be hired out to other companies for ₦25,000 per week and it is believed that it would be hired out for a total of 30 weeks. (ii) The machine has a running cost of ₦7,200 per week. This cost is incurred by the user of the machine. (iii) It is the company’s policy to depreciate non-current assets by 25% per year on a reducing balance basis. (iv) Skilled labour would be required for a total of 9,000 hours during the year. The labour required could be recruited at an hourly rate of ₦120. Alternatively some of the employees currently working on other projects within the company could be transferred to this project. The hourly rate is ₦100 per hour. If these existing employees were to be transferred to this project, replacement will be needed on the existing project work. Replacements on the existing project work would cost ₦110 per hour. (v) Unskilled labour would be required for a total of 12,000 hours during the year. These employees would need to be recruited on a one year contract at a cost of ₦80 per hour. (vi) The project would need to be supervised and it is estimated that there would be a total of 500 hours of supervision required during the year. One of the existing supervisors could undertake this work, but will require a total of 300 hours overtime during the year to carry out the supervision on this project as well as his existing duties. The supervisor earns a salary of ₦500,000 per year for working 2,000 hours and is not paid for overtime work. If this project goes ahead, the supervisor will be paid a bonus of ₦5,000, which would not be paid if the project is not undertaken. (vii) The direct materials required for the project are as follows: Material A The total amount required for the project would have to be purchased at a cost of ₦150,000. Material B The total quantity required would be 10,000 square metres. The company purchased 25,000 square metres of this material for a project two years ago at a total cost of ₦1,000,000. The earlier project used 20,000 square metres of the material and the remainder is currently held in inventory. The company does not foresee any other use for this material in the future and could sell it for ₦20 per square metre. The current purchase price of the material is ₦50 per square metre. (viii) The company has already incurred expenditure of ₦250,000 in analysing the resource requirements of the project. (ix) It is the company’s policy to attribute overhead costs to projects using an absorption rate of 40% of prime costs. (x) It is the company’s policy to add a 25% profit mark-up to total costs when setting its prices.