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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
Decision on which of two mutually exclusive contracts to accept
A company in the civil engineering industry with headquarters located 22 miles from London undertakes contracts anywhere in the United Kingdom.
The company has had its tender for a job in north-east England accepted at £288 000 and work is due to begin in March. However, the company has also been asked to undertake a contract on the south coast of England. The price offered for this contract is £352 000. Both of the contracts cannot be taken simultaneously because of constraints on staff site management personnel and on plant available. An escape clause enables the company to withdraw from the contract in the north-east, provided notice is given before the end of November and an agreed penalty of £28 000 is paid.
The following estimates have been submitted by the company's quantity surveyor:
Cost estimates |
 |  |
 |
North-east |
South coast |
 |
(£) |
(£) |
Materials: |
 |  |
In stock at original cost, Material X |
21600 |
 |
In stock at original cost, Material Y |
 |
24800 |
Firm orders placed at original cost, Material X |
30400 |
 |
Not yet ordered — current cost, Material X |
60000 |
 |
Not yet ordered — current cost, Material Z |
 |
71200 |
Labour — hired locally |
86000 |
110000 |
Site management |
34000 |
34000 |
Staff accommodation and travel for site management |
6800 |
5600 |
Plant on site —depreciation |
9600 |
12800 |
Interest on capital, 8% |
5120 |
6400 |
Total local contract costs |
253520 |
264800 |
Headquarters costs allocated at rate of 5% on total contract costs |
12676 |
13240 |
 |
266196 |
278040 |
Contract price |
288000 |
352000 |
Estimated profit |
21804 |
73960 |
Notes. |
 |  |
(a) to present comparative statements to show the net benefit to the company of undertaking the more advantageous of the two contracts;
(b) to explain the reasoning behind the inclusion in (or omission from) your comparative financial statements, of each item given in the cost estimates and the notes relating thereto
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