Question

TYCHY

Tychy Limited (TL) is engaged in the manufacture of specialised motors. The company has been asked to provide a quotation for building a motor for a large textile industrial unit in Punjab. Following information has been obtained by TL's technical manager in a one-hour meeting with the potential customer. The manager is paid an annual salary equivalent to Rs. 2,500 per eight hour day.

(0) The motor would require 120 ft. of wire-C which is regularly used by TL in production. TL has 300 ft. of wire-C in inventory at the cost of Rs. 65 per The resale value of wire-C is Rs. 63 and its current replacement cost is Rs. 68 per ft.

The motor would also require 50 kg of Wire-D and 30 other small components. Wire-D would be purchased from a supplier at Rs. 10 per kg The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity of wire-D will be of no use to TL after the completion of the contract. The other small components will be purchased from the market at Rs. 80 per component

The manufacturing process would require 250 hours of skilled labour and

30 machine hours.

The skilled workers are paid a guaranteed wage of Rs. 20 per hour and the current spare capacity available with TL for such class of workers is 100 direct labour hours. However, additional labour hours may be obtained by either

Paying overtime at Rs. 23 per hour, or

Hiring temporary workers at Rs. 21 per hour. These workers would require 5 hours of supervision by AL's existing supervisor who would be paid overtime of Rs. 20 per hour

The machine on which the motor would be manufactured was leased by TL last year at a monthly rent of Rs. 5,000 and it has a spare capacity of 110 hours per month. The variable running cost of the machine is Rs. 15 per hour

(iv) Fixed overheads are absorbed at the rate of Rs. 25 per direct labour hour.

Required

Compute the relevant cost of producing textile motor. Give brief reasons for the inclusion or exclusion of any cost from your computation

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Answer 1

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