Hector and Co. Ltd has been invited to tender for a contract to produce 1,000 clothes hangers. The following information relates to the contract.

● Materials: The clothes hangers are made of metal wire covered with a padded fabric.

Each hanger requires 2 metres of wire and 0.5 square metres of fabric.

● Direct labour: skilled: 10 minutes per hanger; unskilled: 5 minutes per hanger.

The business already holds sufficient of each of the materials required to complete the contract. Information on the cost of the materials is as follows:

The metal wire is in constant use by the business for a range of its products. The fabric has no other use for the business and is scheduled to be scrapped.
Unskilled labour, which is paid at the rate of £7.50 an hour, will need to be taken on specifically to undertake the contract. The business is fairly quiet at the moment, which means that a pool of skilled labour exists that will still be employed at full pay of £12.00 an hour to do nothing if the contract does not proceed. The pool of skilled labour is sufficient to complete the contract.
The business charges jobs with overheads on a direct labour hour basis. The production overheads of the entire business for the month in which the contract will be undertaken are estimated at £50,000. The estimated total direct labour hours that will be worked are 12,500. The business tends not to alter the established overhead recovery rate to reflect increases or reductions to estimated total hours arising from new contracts. The total overheads are not expected to increase as a result of undertaking the contract.
The business normally adds 12.5 per cent profit loading to the job cost to arrive at a first estimate of the tender price.
Required:

(a) Price this job on a traditional job-costing basis.

(b) Indicate the minimum price at which the contract could be undertaken such that the business would be neither better nor worse off as a result of doing it.

Transcribed Image Text:

Metal wire Fabric /m /sq m Historic cost 2.20 1.00 Current buying-in cost 2.50 1.10 Scrap value 1.70 0.40