Dem Damps, a welder has been asked to provide a quotation to build grills for a recently purchased house in a gated community for a customer. Damps has to consider the following costs as a basis for a quotation.

1. The contract requires 160,000 pounds of flat iron, 80,000 pounds are already in the warehouse and 80,000 pounds will have to be bought in. This is a standard type of flat iron regularly used by Damps. The 80,000 in inventory were purchased earlier in the year at $40 per 400 pounds. The current replacement cost of this type of iron is $48 per 400 pounds. If the flat irons in inventory are not used on this job Dem is confident that he will be able to use them at some point in the year.

2. 1,280 skilled labour hours are needed and Damps intends to do 320 hours of the skilled work and the remainder will be hired on an hourly basis. The current cost of skilled workers is $4.80 per hour. If Dem Damps does not undertake the welding for this customer, he can either work as a skilled worker for other welders at a rate of $4.80 per hour or spend the 320 hours completing urgently needed repairs to his own house. He has recently had a quotation of $4,800 for labour to repair his home.

3. The project will require 800 hours of unskilled labour and Dem will employ two unskilled workers on contract guaranteeing them a 40 hours week at $2.40 per hour.

The contract is expected to last for 10 weeks.

4. There is a need to rent a heavy-duty drill that costs $1,400. The drill is only needed for the special contract and will not be used for any other purpose.

5. There is a rental cost of $2,080 for a storage yard. If he does not undertake the job, he can rent his yard out to a competitor who will pay him rent of $200 per week for a 10-week period.

6. Dem completed a draft plan of the project beforehand which incurred a cost of $800.

7. Dem would like to earn a 25% mark up for all work undertaken. He knows that there will be a lot of competition for the work and would like to determine the best price possible.

Required:

(a) Advise management on the best price to inform the customer after preparing a cost and profit statement based on the above.

(b) Discuss two advantages and two disadvantages of full cost-plus pricing.