Pennine Heating Systems Limited is a small heating and ventilation system company located in the West Yorkshire town of Dewsbury. It provides customer-designed systems for small businesses. The systems are designed, manufactured and installed specially for each customer. This means that each individual contract has to be priced separately.

The company had expanded rapidly in recent years but as it had done so its overhead costs had continued to increase. The managing director, Ali Shah, had always insisted that contracts should be priced on an absorption cost basis. This was not a problem in the early days of the company. There was then a considerable demand for what Pennine Systems was able to offer and customers almost always accepted whatever was quoted.

More recently, however, the demand for heating and ventilation systems had become less strong, competitors had come into the market, the national economy was in recession and customers were much more conscious about their costs than they used to be when the economy was expanding.

Although Pennine’s reputation was good it had to be particularly sensitive about the price that it charged for its orders. Indeed, Ali sensed that the company was beginning to lose some business because its quotations were too high. He wondered whether he should review the pricing system in order to make sure that the company attracted sufficient business.

Ali was reminded of what he had intended to do late one Friday night when a request for a quotation landed on his desk. On the Monday, he asked Hugh Rodgers, his production manager to cost and to price it. He had the results on the Wednesday morning. Hugh’s calculations were as follows.

Required:

(a) Advise Ali Shah what price Pennine Heating Systems Limited should quote for the contract.

(b) Outline what factors other than price Ali should take into account before offering a firm quotation.

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Direct materials Direct labour Prime cost Factory overhead Factory cost of production Administration overhead Selling and distribution overhead Total operating cost Profit Suggested contract price *say £100 000. £ 14 000 41 500 55 500 11 100 66 600 6 660 9 990 83 250 16 650 99 900*