Advise the managing director as to whether the contract should be allowed to proceed, explaining the reasons for the treatment of each item. (Note: Ignore the time value of money.)

• Contract cost to date (GH¢150,000): This is a sunk cost incurred in the past. It is irrelevant to the current decision of whether to proceed, as it cannot be recovered or changed by any future action.

• Revenue from selling results (GH¢300,000): This is a future cash inflow that will only be realized if the contract proceeds. Therefore, it is a relevant benefit.

• Materials:

  • Cost of material just purchased (GH¢60,000): This is a sunk cost as it has already been incurred. It is irrelevant to the decision.
  • Disposal cost if not used (GH¢5,000): If the contract proceeds, the company avoids this GH¢5,000 disposal cost. Avoiding a cost is a benefit. Therefore, GH¢5,000 is a relevant benefit of proceeding.

• Skilled labour:

  • The workers, if returned to the production department, could generate sales of GH¢150,000 with a prime cost of GH¢100,000. The contribution foregone from this alternative work is GH¢150,000 (sales) - GH¢100,000 (prime cost) = GH¢50,000. This is an opportunity cost of using the skilled labour for the research contract.
  • The overhead absorbed into this production (GH¢20,000) is likely a fixed overhead allocation and not an incremental cash outflow. Therefore, it is irrelevant.
  • Relevant cost: GH¢50,000.

• Research staff:

  • Research wages for the year (GH¢60,000): This is a future cash outflow that will be incurred only if the contract proceeds for another year. Therefore, it is a relevant cost.
  • Redundancy and severance pay:
    • If the contract is discontinued now, the cost is GH¢15,000.
    • If the contract proceeds for one year, the cost will be GH¢35,000.
    • The incremental cost of redundancy if the contract proceeds is GH¢35,000 - GH¢15,000 = GH¢20,000. This is a relevant cost.
  • Total relevant cost: GH¢60,000 + GH¢20,000 = GH¢80,000.

• Equipment (Microscope):

  • Original cost (GH¢18,000) and residual value in two years (GH¢3,000) are irrelevant (sunk cost and future value not directly impacted by this one-year decision).
  • Current disposal value (GH¢8,000): This is the amount that could be received if the microscope is sold now.
  • Disposal value in one year (GH¢6,000): This is the amount that could be received if the microscope is used for the contract and then sold.
  • The opportunity cost of using the microscope for the contract is the reduction in its disposal value: GH¢8,000 (current sale) - GH¢6,000 (future sale) = GH¢2,000. This is a relevant cost.

• Share of general building services:

  • Charged GH¢35,000 pa: This is a fixed cost that will be incurred regardless of the decision to proceed or discontinue the contract. Therefore, it is irrelevant.
  • Annual rental if space is sublet (GH¢7,000): If the contract proceeds, the company foregoes this potential rental income. This is an opportunity cost of proceeding.
  • Relevant cost: GH¢7,000.

Benefits of Proceeding:

• Revenue from selling results: GH¢300,000
• Avoided material disposal cost: GH¢5,000
• Total Benefits: GH¢305,000

Costs of Proceeding:

• Opportunity cost of skilled labour: GH¢50,000
• Research staff wages: GH¢60,000
• Incremental redundancy cost for research staff: GH¢20,000
• Opportunity cost of microscope: GH¢2,000
• Opportunity cost of building space: GH¢7,000
• Total Costs: GH¢139,000

Net Benefit of Proceeding = Total Benefits - Total Costs

Since the net benefit of proceeding with the contract is positive (GH¢166,000), the managing director should allow the contract to proceed.

The final answer is $\boxed{\text{The managing director should allow the contract to proceed, as it yields a net benefit of GH¢166,000.}}$