COSTING IN ACCOUNTS

QUESTION

Manufacture of a new software product is being planned. Estimated cost of the project is $500,000 and the estimated duration is 225 days. The following risks have been identified.

1. There is a 2% probability of a major change of the project costing $100,000 and a delay of 20 days.
2. There is a 10% probability of gaining a new valuable resource that will save the project $25,000 and 30 days.
3. There is a 50% probability that the software will be delayed in its release from the vendor, resulting in an extra $5,000 labour expense and a 50 day delay.
4. There is a 40% probability that the coding may be simpler than expected resulting in a $5000 savings and a saving of 15 days.
5. There is a 5% probability of a major bug causing $10,000 of rework and a 20 day delay.
6. There is a 10% probability of an industrial action delaying the project by 10 days but without any appreciable change in the cost.

Assume that the above six (A to F) are the only risks involved.

Q1

Calculate the expected cost and time required for the project.

Q2

Determine the cost and time for the best scenario.

Q3

Determine the cost and time for the worst scenario.

SOLUTION

Solution:

Estimated cost of the project=$ 500,000

Estimated duration = 225 days

A) expected cost = 585500/1.17 = $ 500427.35

expected time = 273.21/1.17 =233.51 days

B) best scenario is one in which the expected decrease in cost is highest which is B.

Under risk B, , Cost of the project = $475,000 [ 500,000- 25,000]

expected cost for risk B = 500,000- 2,500= $497,500

Time taken to complete the project= 225-30= 195 days

C) worst scenario is one in which the expected increase in cost is highest  which is C.

Under risk C , cost of the project = $505,000  [ 500,000+ 5000]

expected cost = 500,000+ 2,500 = $ 502,500

Time taken to complete the project = 225+50= 275 days.

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