1. You are the management accountant of publishing and printing company which has been asked to quote for the production of program for the local village fair. The work would be carried out in addition to the normal work Of the Company. Because Of existing commitments, some weekend working would be to complete the printing of the program. A Trainee Accountant has produced the following cost estimate based upon the resources required as specified by the production manager.
2. 

You are aware that considerable publicity could be obtained for the company if you are able to win this order and the price quoted must be very competitive.

The following notes are relevant to the cost estimate above:

(i) The paper to be used is currently in stock at a value of ?5,000. It is of an unusual color which has not been used for some time. The replacement price of the paper is ?8,000, whilst the scrap value of that in stock is ?2,500. The production manager does not foresee any alternative use for the paper if it is not used for the village fair program.

(ii) The inks required are not held in stock. They would have to be purchased in bulk at a cost of ?3.000. 80% of the ink purchases would be used in printing the program. No other use in foreseen for the remainder.

(iii) Skilled direct labor is in short supply, and to accommodate the printing of the programs. 50% of the time required would be worked at weekends for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is ?4.00 per hour.

(iv) Unskilled labor is presently under-utilized, and at present 200 hours per week are recorded as idle time. If the printing work is carried out at a weekend, 25 unskilled hours would have to occur at this time, but the employees concerned would be given two hours? time off (for which they would be paid) in lieu of each hour worked.

(v) Variable overhead represents the cost of operating the printing press and binding machines.

(vi) When not being used by the company, the printing is hired to outside companies

For ?6.00 per hour. This earns a contribution of ? 3.00 per hour. There is unlimited demand for this facility.

(vii) Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.

(viii) The cost of the estimating department represents time spent in discussions with the village fair committee concerning the printing of its pregame.

Requirements:

1. Prepare a revised cost estimate using the opportunity cost approach, showing clearly the minimum price that the company should accept for the order. Give reasons for each resources valuation in your cost estimate.

2. Explain why contribution theory is used as a basis for providing information relevant to decision making.

3. Explain the relevance of opportunity costs in decision -making.

Direct material Direct labour Variable overhead Printing press depreciation Fixed production costs Estimating department cost Paper (book value) Inks (purchase price) Skilled 250 hours @ 4.00 - Unskilled 100 hours @3.50 350 hours @ 4.00 200 hours @ 2.50 350 hours @ 6.00 5,000 2,400 1,000 350 1,400 500 2,100 400 13,150