Discussion – Relevant Costs in Decision Making
We are now going to do a task based on our work on Relevant Costs in Decision Making. It is important
to apply this in the workplace.
The IT company are preparing a tender. They don’t want to make a loss on this contract, but they need to
offer a very competitive tender. Prepare your tender and then post it on the Discussion Board. Will you
offer the most competitive bid that won’t cost the company?
Step 1
Start by reading the case study – Attached is the “The IT Company Case Study”.
Step 2
For each of the points above consider which costs are relevant. Build a table as below to identify the
relevant and irrelevant costs. Justify your answer in the end column. I have done the first two for you.
Some points may have more than one figure in them so look at each in turn.
Point Amount Relevant? Irrelevant? Justification
1 £1,500 Yes
The salesperson’s trip to Portugal has already
happened. Whether the company goes ahead
with the contract or not the cost has been
incurred already. It is a past or sunk cost.
2 Engineer 1 Yes
The first engineer has capacity, so they are not
fully booked. AS they are salaried they will get
paid anyway so the cost is already committed –
a sunk cost
Step 3
When you have finished, add up the total relevant costs to find the minimum cost that the IT Company
should charge for the contract if it does not lose money.
Step 4
Respond to the following question:
What other factors should the company consider when deciding what price to bid for the contract?
Consider the non-financial implications for the IT Company.
The IT Company Case Study
The IT Company
The IT Company is a company that specialises in providing technical services to commercial clients.
The company has been approached by a potential client, Now plc, to install a new IT system in their
satellite offices in Lisbon.
The sales manager, Janette is keen to offer a good price for the contract in the hope that this will lead
to more work as the company updates the IT system throughout the organisation.
The following information also needs to be considered:
1. A salesperson has visited the site of the offices in Portugal to meet the manager of the Lisbon
site, provide a demonstration of IT Company’s products. The cost of the trip was £1500.
2. The installation is expected to take three engineers ten days, including travelling time. One of
the engineers has spare capacity, but the other two engineers will be moved off their regular
work which generates a contribution to the organisation of £500 per engineer per day.
Engineers earn a salary of £50,000.
3. A technical advisor would be needed to provide additional specialist skills; the technical
advisor is paid £40 per hour but she is already working at capacity so the IT Company will
need to pay her overtime at 50% above the usual hourly rate. The work for Now plc is likely to
take 8 hours.
4. A sub-contractor will need to make two visits to check on progress. The cost of this will be
£500 per visit
5. The IT Company will need to send a trainer to spend one day at Now plc to deliver training on
the new system. The trainer is paid a monthly salary of £2,500 and receives expenses of £150
for every day spent training clients. Other costs included in the visit will be £1000.
6. The IT Company will provide 200 terminals to Now plc. The current cost of these is £65, but
the IT Company has 40 in stock which it bought for £60. The company uses these terminals
regularly so it will need to replace the inventory it uses.
7. Now plc will also need a control system called a ZX500. The current cost of the ZX500 is
£4,400, but the IT Company has a ZX350 in stock which cost £1,800 when bought. The X350 is
an older model that could be upgraded for a cost of £900. The company has no other use for
the ZX350 and if it is not used in this contract, it will be sold to a local company that has
offered to pay £500, although the current market price of the ZX350 is £1050.
8. 1000 metres of cable will also be required to wire up the system. IT Company currently has
400 metres in stock which cost £1.50 per metre. The current cost is £1.60 per metre. The
company uses this cable frequently.
9. There are 4 weeks in a month and the standard working week is 40 hours.