Trinco Ltd (Trinidad & Tobago-T&T) has been negotiating a contract with a potential customer in Jamaica. Before the negotiations started the Jamaican company agreed to pay $10,000 in advance to cover the expenses of Trinco. These expenses were to cover the costs of sending out technical staff to Jamaica. This is the first export order the company has received since 1988. Unfortunately, the previous export orders were not profitable and managers decided the best strategy was to concentrate on business in T&T.
The sales department has prepared a statement showing that the contract will make a profit. It is normal for the sales department to prepare cost estimates as they have a lot of experience of this type of work.
Occasionally the management accountant will also be asked to comment on the estimates prepared by the sales department. As this order is different and may lead to a lot more business in the future the senior managers asked the management accountant to comment on the statement, shown below.
Statement prepared by sales department
After her investigation the management accountant prepared a brief report. The main points are summarised below.
Question 1
Advise managers whether or not this contract is profitable. All assumptions must be clearly stated.
Question 2
Identify and evaluate any additional information that managers need to consider before accepting or rejecting this contract.