Question 2 (7.5 marks total)

Paint me White are in the furniture manufacturing business. One of their largest customers Red door furniture, wishes to place a significantly large order for painted coffee tables. The customer has issued a purchase order for 1,000 coffee tables. You have spoken with the production supervisor and they have indicated that the factory currently has the capacity to produce this order. Red Door furniture are looking for a significant discount of 20% on the normal retail selling price of $250 Paint me White are charging for coffee tables to their other customers.

You are a little unsure as to whether or not Paint me White will still make a profit on this order, if this discounted price is accepted. You have decided to provide Paint me White with a costing analysis to ensure that this is a viable option for the business.

You have decided to use the current costings for direct materials being used by the company for the production of the coffee tables being $90 per unit. It is estimated that the order will take approximately 8 weeks to complete. There will be approximately 7 factory staff working full time on the order. Each of these staff members will work a 40 hour week and be paid the normal hourly rate of $25 per hour.

Paint me White allocate overhead based on a direct labour hour basis. It is estimated that the total hours to be worked for the whole business for the year will total 220,000 hours.

Estimated overhead for the whole business for the year is estimated at $550,000. In your analysis for Paint me White, you will need to include the following:

1. a) What does the term cost driver mean? What cost driver could Paint me White use other than labour to allocate their overhead for the manufacturing process? Why do you think this might be an appropriate driver to use? (1.5 marks)

2. b) Use job costing to determine the full cost of the order and on the basis of this full cost, make a recommendation on whether the discount should be given. This analysis should provide all necessary workings and be clearly presented so that the owner of Paint me White can easily follow and understand. (6 marks)