Intermediate: Determining minimum short¬ term acceptable selling price Company A expects to have 2000 direct labour hours of manufacturing capacity (in normal time) available over the next two months after comple¬ tion of current regular orders. It is considering two options in order to utilize the spare capacity. If the available hours are not utilized direct labour costs would not be incurred.

The first option involves the early manufacture of a firm future order which would as a result reduce the currently anticipated need for overtime working in a few months time. The premium for overtime working is 30% of the basic rate of £4.00 per hour, and is charged to production as a direct labour cost. Overheads are charged at £6.00 per direct labour hour. 40% of overhead costs are variable with hours worked.

Alternatively, Company A has just been asked to quote for a one-offjob to be completed over the next two months and which would require the following resources:

1. Raw materials:

(i) 960 kg of Material X which has a current weighted average cost in stock of £3.02 per kg and a replacement cost of £3.10 per kg. Material X is used continuously by Company A.

(ii) 570 kg of Material Y which is in stock at £5.26 per kg. It has a current replacement cost of £5.85 per kg. If used. Material Y would not be replaced. It has no other anticipated use, other than disposal for £2.30 per kg.

(iii) Other materials costing £3360.

2. Direct labour. 2200 hours.
Required:

(a) Establish the minimum quote that could be tendered for the one-off job such that it would increase Company A’s profit, compared with the alternative use of spare capacity. (Ignore the interest cost/ benefit associated with the different timing of cash flows from the different options.) (12 marks)

(b) Explain, and provide illustrations of, the following terms:
(i) sunk cost, (3 marks)
(ii) opportunity cost, (3 marks)
(iii) incremental cost.