QUESTION
Safe Safes Ltd design and make floor safes to individual client's specifications. The company has been asked to tender for the design, manufacture and installation of a floor safe at the Henley-on-Thames home of a merchant banker.
The cost of visiting this client and agreeing the design specification was £360.
The design specification, as agreed with the client, requires the use of certain specified materials regularly used by the company. The current price for these materials is £3,250, but there is sufficient material in stock that originally cost £1,840 when it was purchased.
The machinery to be used on this order would be depreciated by £700 for the week that it would be used, and the electricity to run this machinery for one week would cost £220. The machinery would be in continual use whether this order was received or not.
Two months ago Safe Safes Ltd purchased mobile lifting equipment of advanced design at an introductory cost of £1,580. This equipment has remained unused, but would be useful in installing the safe on this order as its advanced design allows in to be used safely within clients' homes. Its list price is now £1,850. If disposed of now it could be sold for £1,050, but if used on the proposed job and then disposed of afterwards it would only sell for £425: because it would no longer be unused.
The factory is working at full capacity and the order would require the services of two of the skilled employees for a week, each of whom earns £800 a week.
In fulfilling the order work generating £2,500 extra revenue would be lost.
Fixed overheads are recovered at 125% of direct labour; which, with this contract, would be £800 x 2 employees x 125% = £2,000.
REQUIRED:
(a) Calculate the relevant cost to Safe Safes Ltd of designing, making and installing the floor safe for this prospective client.
(b) For each amount mentioned in the question briefly explain why you either included, or excluded, it from your calculation in (a) above.
The amounts mentioned are (1) visiting the client and agreeing the design specification; (2) the materials used, (3) the machinery depreciation; (4) electricity consumption; (5) the unused mobile lifting equipment; (6) the wages of the two skilled employees (7) the extra cash lost; and (8) the fixed overheads.
QUESTION
A restaurateur is about to purchase the 25-year lease on the property adjoining his restaurant, with a view developing it as a coffee shop.
The adjoining property was previously a 7-11 grocery store. Arising from this, the following points have been noted:
1. The 25-year lease for the adjoining property will cost £250,000.
2. The company have already paid a surveyor £6,000 fee to fully examine the condition of the adjoining property and its suitability for the intended use.
3. The restaurant's lawyers have stated that their fees will be £3,400.
4. The restaurant's lease cost £80,000 when signed five years ago, but is now valued at £310,000.
5. The fittings in the 7-11 grocery store will be sold for £4,000
6. Following the acquisition of the lease it is intended to refurbish both the restaurant and the coffee shop at a total cost of £150,000.
7. The cost of this refurbishment will be depreciated by the straight-line method over 5 years (i.e. £30,000 yearly).
8. The lease on the coffee shop is to be amortised over the 25 years at £10,000 yearly.
9. The £40,000 annual salary of the restaurant manageress will be increased to £50,000, as she will be expected to spend one-third of her time managing the coffee shop.
10. With waiters needed to cover both the restaurant and the coffee shop, two additional waiters will be employed at an annual salary of £15,000 each.
11. Annual heating and lighting of the coffee shop will be £15,000, but there will be an annual saving of £4,000 on the annual heating and lighting costs of the restaurant.
REQUIRED:
For each of the eleven points above, determine the effects on business' cash flows, explaining for each why it is either relevant, or irrelevant.