Advanced: Calculation of cost-plus selling price and incremental cost using the learning curve A company has to quote for a special order to be made in its two departments, A and S. Details are as follows

No overtime premium has been included in the calculation of overhead but, when necessary, overtime is paid at time and a half.
The special order involves special tooling to be used in department A at a total cost of £600, chargeable to the customer.
In arriving at selling prices, the company adds profit margins of:
25% of total cost in department A 15% of total cost in department S 5% of total cost on any sub-contractors' work.
No profit margins are added to direct materials or to special tooling.
If the order is for 200 units or fewer, it will need to be done during period 5 whiGh already has a work-load of:

For this order a sub-contractor has quoted £16 per unit for the work that would be done by department S.
Because of the sub-contractor's apparently keen prices and the fact that department S has been operating at rather low levels, the company is wondering whether it should close department S and have the sub-contractor do the work that department S normally does.
You are required:

(a) to recommend the price to be charged for units made entirely within the company for an order of (i) 100 units, (3 marks)
(ii) 200 units, (8 marks)

(b) assuming an order for 200 units has been placed as in (a)
(ii) above, to recommend the lowest price the company could charge for an additional order of 600 units in the following conditions:

• the company wished to treat this as an incremental order but did not wish to make a loss on it, and • the additional work would be done when there were no capacity constraints for either department, and • the materials supplier would charge the price at the 800 level; (10 marks)

(c) to recommend in what circumstances (i) the sub-contractor should be used for this order, (4 marks)
(ii) you would agree to the idea of closing department S and having its work done by the sub-contractor

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Standard direct wage rate (per hour) Department R Department S 5 3 2.50 2 6 4 12 6 4000 3000 80% 70% Standard variable overhead (per hour) Standard fixed overhead (per hour) Direct labour hours per unit (for first 100 units) Direct labour hours available (per period) Expected rate of learning curve (applied per block of 100 units) Cost of direct materials used in department R: Level of output 100 200 800 Cost per unit of output 36.00 32.40 27.00