Electronic Control System, Kaplan Kit.

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  • Profile photo of acca13
    acca13
    Participant
    • Topics: 54
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    Hi :)

    Companies RP, RR, RS and RT are members of a group, RP wishes to buy an electronic control system for its factory and, in accordance with group policy, must obtain quotations from companies inside and outside of the group.

    From outside of the group the following quotations are received:

    a) Company A quoted $33,200
    b) Company B quoted $35,000 but would buy a special unit from RS for $13000. To make this unit, however, RS would need to buy parts from IIk at a price of $7500.

    The inside quotation was from RS whose price was $48000. This would require RS buying parts from RR at a price of $8000 and units from RT at a price of $30,000. However , RT would need to buy parts from RR at a price of $11,000.

    Additional data is:

    1- RR is extremely busy with work outside the group and has quoted current market prices for all of its products

    2- RS costs for the RP contract, including purchases from RR and RT , total $42,000. For the company B contract it expects a profit of 25% on the cost of its own work

    3- RT prices provide for a 20% profit margin on total costs

    4- The variable costs of the group companies in respect of the work under consideration are:

    RR: 20% of selling price
    RS: 70% of own cost (excluding purchases from from other group companies)
    RT: 65% of own cost (excluding purchases from other group companies).

    Required: which contract to be accepted.

    In the sloution, the part I don’t get is how they calculated relevant cost of RS and RT:

    Buy from external company B:[/b]

    Relevant cost of RT:
    (125% * own costs) + 7500 = 13000

    therefore own costs = 5500/1.25 = 4400

    Buy from RS:

    Relevant cost of RT:
    Total cost = $30,000 (20% margin on cost) = $25000
    Less: transferred cost from RR (11000)
    own cost = 14000
    variable cost to group = 14000* 65% = (9100)
    Relevant cost of RS: 42000 – ( 30,000 + 8000) = 2800

    Could you please explain how they calculated own cost of RS?

    Thanks in advance.


    Profile photo of Vipin
    Vipin
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    • Topics: 96
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    if the company chooses from company b, then we have to calculate the relevant cost of RS. it is because they are in the group.
    company B will have to purchase parts from RS for a price of 13,000.
    at the same time , to make that component RS has to purchase another part from another company for a price of $7500. when i did this for first time, my head was swinging.
    cost of RS=their own cost +7500(price of part bought from outside).
    but in the question, they also gave another statement which is a clue for calculation.

    this is in additional data condition 2

    2- RS costs for the RP contract, including purchases from RR and RT , total $42,000. For the company B contract it expects a profit of 25% on the cost of its own work

    consider the statement below,

    For the company B contract it expects a profit of 25% on the cost of its own work

    that is the clue for calculation.
    they are taking profit margin only on cost of its own. NOTE, not on entire cost.

    so they take,
    own cost *125%+7500=13000(selling price to company B)
    own cost*125%=5500
    own cost=5,500/125%=4400


    Profile photo of acca13
    acca13
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    • Topics: 54
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    Vipin, loads of thanks!

    Could you pls tell me the other part too if you’ve some spare time, Relevant cost of RT?

    May you Pass your papers in first attempt :) Amin


    Profile photo of Vipin
    Vipin
    Participant
    • Topics: 96
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    total cost for RT 25000(30000/120%)
    own cost of RT 14000(25000-11000)
    variable cost of RT 9100(65% of 14000)


    (2)

    it is given
    3- RT prices provide for a 20% profit margin on total costs
    so we do the step
    total cost for RT 25000(30000/120%)

    also given
    RT: 65% of own cost (excluding purchases from other group companies).
    so we do the step,
    variable cost of RT 9100(65% of 14000)


    Profile photo of Vipin
    Vipin
    Participant
    • Topics: 96
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    sir,
    i didnt understand the step below,

    opportunity cost of external sales forgone by RR
    8000+11000=19000

    thanks

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