‘THE UNIVERSITY OF THE WEST INDIES EXAMINATIONS OF December _ 2010. CODE AND NAME OF COURSF: ACCT6025 Construction Accounting and Finance DATE AND TIME: DURATION: 3 Hours INSTRUCTIONS TO CANDIDATES: This paper has 5 pages and 4 questions. ANSWER ANY THREE (3) QUESTIONS Question 1 [20 marks] Tammy Best Construction Company (TECC) builds prefabricated houses and wooden houses for ow income households. Because of increasing competition, TBCC is corsidering investing in an automated system. Since competition is most keen for the prefabricated houses, the process for this line has been selected for initial evaluation. The automated system for the prefabricated houses line would replace an existing system (purchased one year ago for $6 milion). Although the existing system will be fully depreciated in nine years, it is expected to last another ten years, The automated system would also have a useful life of ten years. “The existing system is cepable of producing 1,000 prefabricated houses per year. Sales and production data using the existing system are provided by the Accounting Department: Sales per year (units) 10,000 Selling price $30,000 Costs per uni Direct materials 8,000 Direct labor 9,000 Variable overhead 2,000 Direct fixed overhead* 4,000 + All cash expenses with the exception of depreciation, which is $600 per house. The existing equipment is being depreciated using the straight-line method with no salvage value considered. ‘The automated system will cost $34 milion to purchase, plus an estimated $20 millon for implementation. If the automated equipment is purchased, the old equipment can be sold for $3 million. TURN OVER ‘The University ofthe West Indies Course Code ACCTSO2S 2010The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct materials cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and, es a consequence, volume related overhead will be reduced by $400 per unit. Direct labour is reduced by 60 percent, Other information: * IF TBCC keeps the old system, sales will drop by 200 units to 800 units per year * the automated equipment could be sold for $4 million at the end of ten years. The implementation will have zero salvage value at any time after the implementation + the equipment of the old system would have no salvage value at the end of ten years, + the firm's cost of capital is 12 percent. + the tax rate is 40 percent. * the implementation costs are depreciated for tax purposes over 5 years on the straight- line basis. * the automated system will require an initial increase in working capital of $5,000,000 followed by another increase of $2,000,000 at the end of year 5. . the automated system cost of $54,000,000 will be depreciated on a straight line basis over 10 years * total annual fixed costs for the automated system will be $6,000,000 Required - Do you recommend that TBC purchase the automated system, Show detalled calculations. Que: n 2 [20 marks] @) A project consists of three tasks, Task A is scheduled to begin at the start of week 1 and finish at the end of week 3. Task B is scheduled to begin at the start of week 1 and finish at the end of week 2. Task C is scheduled to begin at the start of week 2 and end at the end of week 3. The budgeted cost for task A is $22,000, for task B is $17,000 and for task C is $15,000. At the end of the second week task A is 65% complete, task Bis 95% complete and task C is 60% complete. The actual cast of the work performed at the end of the second week for the project is $37,900. The cost performance index is estimated to remain the same throughout the remainder of the project. i. Calculate the schedule performance index for the project at the end of the second week [ 3 marks} Determine the cost performance index for the project [3 marks] Determine the total estimated cost at completion and estimated cost to complete the project. [4 marks] b) Your construction company is bidding against two construction companies for the UWT library extension with a quantity surveyors estimate of $1,500,000 to $1,600,000. Your company’s minimum profit and overhead markup is 8%. Details pertaining to your competitors bids are presented in the table below: TURN OVER ‘The University of the West Indies Course Code ACCTO2S 2010 . tc Cote ACCT ORS 201 OO‘Tammy Construction Co_| Project Bid Cost Profit and overhead _ markup _ Valley resource centre | $ 1,444,172.40_ $1,318,270.80 9.55% Glebe Polyciinic $86,337.90 | § 69,572.25 24.10% Glidden Building Society | Project | Bid Gall Hill Library $295,760.85 Valley resource centre $1,418,112.30 ['St. John Polyclinic ~1$ 1,901,846,10 ‘What are your chances of increasing your profit and overhead markup above the minimum. 8%. [5 marks] ¢) Your construction company recently bid against Giydon construction Company. Your construction costs were $2,251,044 and you added a 8.25% profit and overhead markup for the total bid of $2,436,755. Glydon construction Company bid was $2,359,998. What profit and overhead markup would you need to add to your construction costs to get Glydor’s bid? [2 marks] d) A.construction company has a fixed overhead of $1,000,000 and variable overhead of 2% of revenue. Historically, construction costs have been 85% of revenue. What is the minimum amount of sales that required to break-even? [3 marks] Question 3 [20 marks] Arthur Construction Inc builds three different styles of middle income houses. Management estimates that during the third quarter of 2010 the company will be operating at 80% of normal capacity. Because Arthur desires a higher utilization of plant capacity, the campany will consider a special order. Arthur has received special-order inquiries from two cilents. The first order is from JCP, Inc., which would like a house built that is similar to one of Arthur's houses, The JCP house would be then be sold under JCP's own label. JCP, Inc., has offered Anchor $575,000 for the house to be completed by December 31, 2010. The cost data for the Arthur's house, which would be similar to the specifications of the ICP special order, are as follows: Regular selling price per unit $900,000 Costs per unit: Raw materials $250,000 Direct labour 5,000 hours @ $60.00 300,000 Overhead 2,500machine hours @ $40.00 100,000 Total costs $650,000 TURN OVER ‘The University ofthe West Indies Course Code ACCTSN2S 2010 Oe Ce ACCT 2 a ee