a) The paper to be used is currently in inventory at a value of £3,500. It is of an unusual colour that has not been used for some time. The replacement price of the paper is currently £5,000, whilst the scrap value is currently £1,750. The production manager does not foresee any alternative use for the paper if it is not used for the music festival flyers.

b) The ink required is not currently held in inventory. It would have to be purchased in bulk at a cost of £2,375. Only 80% of the ink purchased would be used in printing the flyers. No other

use is foreseen for the remainder, which would have no scrap value.

c) Skilled labour is in short supply and to accommodate the printing of the flyers 50% of the skilled labour time required would be worked at weekends, for which a premium of 25% above the normal hourly rate is paid. The normal rate is £9.00 per hour. The company does not normally undertake any work whatsoever at weekends.

d) Unskilled labour is currently under-utilised and at present, 150 hours per week are recorded as idle time. If the music festival printing work is carried out, 25 of the required unskilled hours would have to be worked at the weekend. However, instead of being paid for this weekend's work, the employees concerned would be given two hours’ time off (for which they would be paid) in lieu of each hour worked at the weekend.

e) Variable overheads represent the incremental costs of operating the printing press and binding machines for the work on the music festival programmes.

f) When not being used by the company, the printing press is hired by outside companies for £5.50 per hour. There is unlimited demand for this facility.

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

h) The costs of the Estimating Department represent time spent in discussion with the music festival organisers last month concerning the printing of their programme.

1) Identify and explain the characteristics of both relevant and irrelevant costs in short-term decision-making

2) Using relevant cost principles, provide a revised cost estimate that shows the minimum price that the company should offer for the music festival order. Give precise reasons for each figure (including any zeros) in your relevant cost estimate.

3) Explain three other factors Freshprints should consider before quoting for the order.

Printwork, a publishing and printing company, has been asked to quote for the production and printing of a flyer to promote a local music festival. The work would be carried out in addition to the company's normal work. Due to existing commitments, some weekend work would be required to complete the printing of the programme. A trainee accountant has produced the following cost estimate based on the resource requirements specified by the company's production manager. Direct materials Paper (book value) Ink (purchase price) Direct labour Skilled: 200 hours @ 9.00 per hour Unskilled: 75 hours @ 8.00 per hour Variable overheads 275 hours @ 4.00 per hour Printing press depreciation 150 hours @ 2.50 per hour Fixed production costs 275 hours @ 6.00 per hour Estimating Department costs Total cost 3,500 1.900 1,800 600 5,400 2,400 1,100 375 1,650 375 11.300 The company would receive considerable publicity if it were able to win this order and therefore the price quoted must be competitive. The following information is available in respect of the cost estimate above: