[dr.saleh]

A research contract, which to date has cost the company $150,000 is under review. If the contract is allowed to proceed: it will be completed in approximately one year. The results would then be sold a government agency for $300,000.
Shown below are the additional expenses which the managing director estimates will be necessary to complete the work.
Materials
• This material for contract has just been purchased at a cost of $ 60,000.
• It is toxic, if not used in this contract it disposed of at a cost of $ 5,000.

Labor
– Skilled labor is hard to recruit.
– The workers concerned were transferred to the contract from a production department, and at a recent meeting, the production manager claimed that if the men were returned to him they could generate sales of 150,000 in next year.
• The prime cost of these sales would be 100,000 including $ 40,000 for the labor cost itself.
• The overhead absorbed into this production would amount to $ 20,000
Research staff
– It has been decided that when work on this contract ceases, the research department will be closed,
– Research wages for the year are $ 60,000 and redundancy and severance pay has been estimated at 15,000 now. Or $ 35,000 in one year’s time.
Equipment
– The contract utilizes a special microscope which cost $ 18,000 three year ago.
– It has a residual value of $ 3,000 in another two years. And a current disposal value of 8000.
– If used on the contract it is estimated that the disposal value in a year’s time will be $ 6,000.
share of general building services
– The contract is charged with $ 35,000 pa to cover general building expenses.
– Immediately after the contract of discontinued, the space occupied.
Required:
Advise the managing director as to whether the contract should be allowed to proceed, explaining the reasons for the treatment of each item.
(note: ignore the time value of money)

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