QUESTION 1

You are the owner of a florist shop in a small town in the UK, selling floral arrangements in store. You are considering expanding the business to offer wedding flower services in addition to the usual range of floral goods and services that you provide on a daily basis. You are also considering whether you should out-source some of your work to a third-party.

You have recently been asked to provide 10 floral table arrangements for a large wedding. You have one assistant working in your shop with you who is paid 10 an hour. The flowers will need to be delivered and set up at the wedding venue on the morning of the wedding. This would require both you and the assistant to attend in order to set it up in time before the wedding starts.

You would buy flowers from the wholesaler at a cost of 5 per bunch. You would also use ribbon and other materials for presenting the flowers that you already have in stock which cost you a total of 25. You would need to spend 12 on fuel costs to get to the wedding and back and you expect it to take two hours in total to deliver the displays during which time the shop will be closed. If you decide not to provide the flowers for the wedding you would simply sell them in your shop for 8 a bunch. Your usual mark-up on floral arrangements is 60%.

As well as the possible wedding contract, the shop is very busy making a lot of wreath displays which are hung by customers on the front doors of their homes. You find that the shop is very busy at this time of year, even without the additional demand for wreaths, so have been considering whether to out-source the making of the wreaths to a local company. The local company can provide the wreaths at a price of 12 per unit. If you were to produce the wreaths in-house the variable cost would be 8 per unit and you would lose contributions from the creation of other floral products for other customers of 7 per unit.

You recently completed a finance for small business owners course and have been looking into the use of different methods of costing for your shop.

Required:

(a) Based on the above information, calculate the minimum price that you should charge to

provide the flowers for the wedding, providing justification for your recommendation.

b) Identify and explain three qualitative costs OR benefits that could also be taken into account when deciding whether to accept the wedding contract.

c) Explain what is meant by the term contribution and why, in some business decisions, fixed costs are irrelevant and then recommend whether the wreaths should be produced in-house or out-sourced, justifying your answer with clear reasons and supporting calculations.