M is designing and building a special computer for D. The price for the new computer is equal to M's costs of building it plus a flat fee of $50,000.
M's expense accounts:
Emloyment Costs:
Wages & salaries, including vacation pay and sick leave
Social security taxes
Plant and Machinery Costs:
Depreciation
Repair and maintenance
Plant protection
Selling
General and Administration
Financing
Question: How should the computation of M's costs be apprached in the contract between M and D? Are there any problems calling for special attention?
To compute M's costs in the contract between M and D, you will need to consider the expense accounts provided. Here is an approach to compute M's costs:
1. Employment Costs: Calculate the total wages, salaries, vacation pay, and sick leave for the employees involved in designing and building the computer. Add the social security taxes paid by M for those employees.
2. Plant and Machinery Costs: Determine the depreciation expenses for the plant and machinery used in the computer's construction. Include the costs for repair, maintenance, and plant protection related to the computer's development.
3. Selling Costs: Consider any expenses associated with selling the computer, such as marketing, advertising, or commissions.
4. General and Administration Costs: Include the general and administrative expenses incurred by M while building the computer.
5. Financing Costs: Account for any financing costs related to the design and construction of the computer, such as interest payments on loans or other financial obligations.
Once you have determined these costs, add them together to calculate M's total costs. Then, add a flat fee of $50,000 to represent the additional charge for M's efforts.
Special attention should be given to ensure that all relevant costs are considered and properly accounted for in the computation. It is important to have a clear understanding of each expense account and determine which costs are directly attributable to designing and building the computer. Accuracy in calculating the costs is essential to ensure a fair and reasonable price for the new computer in the contract between M and D.