Intermediate: Calculation of minimum selling price You have received a request from EXE pic to provide a
Question:
Intermediate: Calculation of minimum selling price You have received a request from EXE pic to provide a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared:
1. The steel is regularly used, and has a current stock value of £5.00 per sq. metre. There are currently 100 sq. metres in stock. The steel is readily available at a price of £5.50 per sq. metre.
2. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of £20 for the fittings required.
3. The skilled labour is currently employed by your company and paid at a rate of £8.00 per hour. If this job were undertaken it would be necessary either to work 25 hours overtime which would be paid at time plus one half or to reduce production of another product which earns a contribution of £13.00 per hour.
4. The semi-skilled labour currently has sufficient paid idle time to be able to complete this work.
5. The overhead absorptionrate includespowercosts which are directly related to machine usage. Ifthis job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of £0.75 per hour. There are no other overhead costs which can be specifically identified with this job.
6. The cost of the estimating time is that attributed to the four hours taken by the engineers to analyse the drawings and determine the cost estimate given above.
7. It is company policy to add 20% on to the production cost as an allowance against admin¬ istration costs associated with the jobs accepted.
8. This is the standard profit added by your company as part of its pricing policy.
Required:
(a) Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimate.
(12 marks)
(b) There may be a possibility of repeat orders from EXE pic which would occupy part of normal production capacity. What factors need to be considered before quoting for this order?
(c)When an organisation identifies that it has a single production resource which is in short supply, but is used by more than one product, the optimum production plan is determined by ranking the products according to their contri¬ bution per unit of the scarce resource.
Using a numerical example of your own, reconcile this approach with the opportunity cost approach used in
(a) above.
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