Question 04 You are an accountant at JLX chemicals. The company produces a range of household and industrial cleaning products. The company has been approached by a large DIY chain. The customer (the DIY chain) has requested a quote for 40,000 bottles of household cleaning spray. The trainee accountant has prepared a cost estimate for the 40,000 bottles as follows: Chemical X (5000 litres at a cost of 2 per litre) Chemical Y (4000 litres at a cost of 2.25 per litre) Chemical Z (3500 litres at a cost of 1.5 per litre) Bottles (0.10 each) Boxes (4000 boxes at 0.20 per box) Labels Labour (40 hours at 10 per hour) Mixing machine cost (20 hours at 6 per hour) Overhead costs (40 hours at 10 per hour) Total =10,000 =9,000 =5,250 =4,000 =800 =50 =-400 =120 =400 = 30,020 The competition in the industry is high and JLX chemicals would like to secure this order. Therefore, your line manager the Chief financial officer has asked you to review the quotation above. Given that this is a one off order, you are aware that a better approach would be to use relevant costing. Hence you have spoken to colleagues in the stores and production department and identified the following: Chemicals X 20,0001 are in stock. The stock was bought at the price of 2 per litre. The prices have increased now to 2.5 per litre. This chemical is used in one of your most popular products and is regularly used by the production department. Chemical Y 35001 of chemical Y is in stock. The current stock was purchased at a price of 2.25 per litre some time ago. The company currently does not use this chemical in its daily production and had been expecting to sell the existing stock at a scrap value of 0.5 per litre. Any extra stock of this material will have to be bought at the current market price of 2.40 per litre. Chemical Z This is a highly corrosive and toxic chemical. The company bought this a few months ago. It is not regularly used and has no other use. The company and was expecting to dispose the stocks off. However, disposal was expected to cost the company 1500 because safe disposal was required. Bottles and labels: These are not in stock and will need to be bought if this order is accepted. Boxes: Boxes refer to large brown cardboard boxes. These are used daily to pack and deliver cleaning products to customers. There has been no change in the market price mentioned. Labour There is sufficient spare capacity of labour in the factory to complete the order. Mixing machine The cost of 6 is what is used in costing the company's main products. Out of this only 1 per hour is incremental to the production of the houschold cleaning products ordered as this 1 relates to the power cost of running the machine. Overheads The 10per hour is the overhead absorption rate. Out of this 4 per hour are known to be variable and 6 are fixed. There are no incremental fixed costs specific to the order. Required a) Present a new cost estimate for the order of 40,000 bottles of the household cleaning spray based on relevant costing and provide an explanation for your choice of relevant cost for each item. (18 Marks) b) Explain why relevant costing is suitable for this sort of decision and the possible problems that the company may encounter if the customer returns for further repeat orders. (07 Marks) (25 Marks) cleaning spray based on relevant costing and provide an explanation for your choice of relevant cost for each item. (18 Marks)
