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QUESTION $3$

Storm Environmental Ltd manufactures wind turbines. It recently completed a turbine for a customer who has just declared bankruptcy. This customer has paid a $10,000$ non$-$ refundable deposit but is unable to pay any further amount due.

The firm has found an alternative buyer for this turbine, but the new customer requires certain modifications to the unit$$s specifications before the sale can be completed. Storm Environmental has the spare capacity to complete the modification and the sale could lead to repeat orders from the customer. In addition, production of the modified product will allow the firm$$s engineers to acquire additional knowledge about the design of more efficient wind turbines.

The Accounting Department has prepared the following price estimate for the alternative customer:

Cost$/$price estimate for the modified turbine

Cost of the work completed Less deposit received

Net cost to date

Modification costs Aluminium $-160$ sq metres Copper wire $2,000$ kg

Labour $-100$ hours at $30$ per hour Overheads

Total cost of the modified turbine Profit markup $20\%$

Estimated price for alternative customer

$$

$60,000$

$(10,000)$

$50,000$

$24,0003,00010,00087,00017,400104,400$

$8,00016,000$

$$ LSE ST $2023/$AC$415$

Page $4$ of $7$

$$ LSE ST $2023/$AC$415$

Page $5$ of $7$

The following information is also relevant:

$($i$)$ The unmodified turbine has a scrap value $6,000.$

$($ii$)$ The aluminium that would be used in the modification work is rarely used by the firm. There are $100$ metres in stock, which were bought $5$ years ago for $50$ per square metre. If not used on this job, it could be sold for $30$ per square metre. Suppliers presently charge $60$ per square metre for new aluminium.

$($iii$)$ The copper wire required is in stock. It was purchased for $8$ per kilogram and could be sold for a scrap value of $3$ per kilogram. Copper wire is an essential material for all the turbines that the firm makes. Due to a slump in the world price of this wire, the replacement cost is $6\mathrm{.}50$ per kilogram.

$($iv$)$ The labour required for the modification work has to be transferred from an existing job. The labour transfer will delay the completion of that job, resulting in the firm having to pay a contract penalty of $2,000.$

$($v$)$ The total overhead of $10,000$ includes the wages of an additional engineer, who will be taken on for the duration of the modifications at a rate of $100$ per hour. It is expected that he will be required for $1$ hour of inspection work for every $10$ labour hours devoted to the project. All other overheads represent general fixed overheads, which will be apportioned to the modification work.

$($vi$)$ If the modification work is not carried out, a local environmental charity has agreed to give the firm a $2,000$ non$-$refundable grant as $$compensation$$ for its bankrupt customer.

$($vii$)$ The firm estimates that the marketing expenses incurred in finding the new customer were $1,500.$

$($viii$)$ The company normally uses a $40\%$ mark$-$up to cost to calculate the selling price. On this occasion, given the special situation, the Accounting Department has reduced this to $20\%.$

$($iv$)$ Before the modified turbine can be sold, the firm must obtain a license costing $1,400$ from the environmental regulator.

REQUIRED

$($a$)$ Calculate the minimum price that Storm Environmental could charge for the modified turbine if it is to cover the relevant costs of the project. Your answer should provide explanation for why you have either excluded or included each item within the question. State any assumptions which you make.

$(20$ marks$)$

$($c$)$ Identify non$-$financial factors that Storm Environmental should also consider before signing the contract with the new customer.

$(10$ marks$)[$Total $30$ marks$]$

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