Connolly Ltd designs and manufactures carriages for trains. The manager returned from a trade exhibition with a potential overseas order for 30 carriages for delivery in two months. Some preliminary work has been undertaken in relation to the potential order between speaking to the client and the manager returning to the office. The overseas client has stated that the maximum price that they will pay per carriage will be 16,000.

As Connolly Ltd is keen to get this order you have been tasked to evaluate the costs involved. The following are the costs identified with the potential order:

Research into labour/ materials availability In order to assess the practicalities of taking on this order Connolly Ltd employed a company to research the availability of materials and labour. This research cost 11,000 in total. Of this, 7,000 has already been paid and the remaining 4,000 will be paid in one week.

(when answering this cost please deal with it in 2 separate amounts i.e. 7,000 and 4,000 - see suggested answer layout).

Material A - 40 units required per carriage.

There are no units in inventory. Current purchase price is 7 per unit.

Material B - 150 units required per carriage There are currently 1,000 in inventory which were purchased for 10 per unit. The current purchase price is 14 per unit. The material has no use in the company other than for the project under consideration. Units in inventory can be sold for 5 per unit.

Material C - 120 units required per carriage

There are currently 50 purchased for 20 per unit in inventory. Current purchase price is 22 per unit. The material is regularly used in current manufacturing operations. In 3 months' time the replacement price is projected to be 25 per unit.

Labour - Unskilled - 12,000 hours in total

Paid at 8 per hour and existing staff are fully utilised. The company will hire new staff to meet this additional demand.

Labour - Semi skilled - 2,000 hours in total Paid at 12 per hour. These employees are difficult to recruit and the company retains a number of permanently employed staff, even if there is no work to do. There is currently 800 hours of idle time available and any additional hours would be fulfilled by temporary staff that would be paid at 14/hour.

Labour - Skilled - 8,000 hours in total Paid at 15 per hour. There is a severe shortage of employees with these skills and the only way that this labour can be provided for the new project would be for the company to move employees away from making Product X. A unit of Product X takes 4 hours to make and makes a contribution of 24 per unit.

Variable overheads

Variable overheads are absorbed at a rate of 10 per skilled labour hour.

Answer rating: 100% (QA)

To evaluate the costs involved in the potential overseas order for 30 carriages lets break down the costs 1 Research into labormaterials availability The total cost of the research is 11000 7000 has a... View the full answer