A major customer of Local Company has recently ceased trading. This has left Local Companywith 1,500 direct labour hours of spare capacity in normal time over the next period. The labour force could be laid off for the period at no extra cost and as a result the direct labour cost would not be incurred.

However there are two possible options for the utilization of this spare capacity.

Option 1: machine cleaning

The first option is to bring forward the routine cleaning of machinery which would normally be carried out later in the year by a specialist cleaning firm. This firm works at weekends so that production activities are not disturbed. The cleaning could be done by Local Company 's direct labour force in the 1,500 spare normal hours in the next period. As a result the cleaning firm's charge of $10,200 would be saved.

Option 2: special order

The second option is to tender for a special order which could be completed during the next period, using the following resources.

Material A

This material is in regular use in Local Company 's manufacturing operations. 420 kg will be needed and Local Company has 700 kg in stock which were purchased at $4.20 per kg. The replacement cost of this material is $4.25 kg.

Material W

80 kg of material W is required, which is in stock as the result of previous over-buying. The material originally cost $6.28 per kg but is no longer used by Local Company . It has a replacement cost of $6.56 or it could be sold as scrap for $2.80 per kg.

Other material

Other material costing $1,680 would be purchased specifically for this special order.

Direct labour

1,720 hours of direct labour would be required. Overtime is paid at a premium of 50% of the basic rate of $3 per hour.

Overhead

Overhead is applied using a direct labour rate of $7 per hour. 30% of overhead varies in direct proportion to labour hours worked. The remainder is fixed.

Required:

Calculate the minimum (breakeven) price that could be quoted for the special order, so that Local Company would not be worse off as a result of winning the order rather than using the labour for machine cleaning. Ignore the effect of the different timings of the cash flows involved.