Question 5 A company has just completed an order for a customer, who has gone into liquidation before taking delivery. The sales department has finally found a potential customer who will buy the product if certain conversion work is undertaken. The company has already spent $20,000 on manufacturing the product and the following information relating to the proposed conversion work is collected. $ 2,000 Materials required at cost Direct wages: four workers 2,000 Variable overheads 400 Depreciation 1,000 Foreman 150 Fixed production overhead cost 800 6,350 It is company policy to price its products at 25% mark up on cost, and accordingly a price of $32,937.50 ($20,000+ 6,350 +6,587.30) would be quoted. Notes: (a) The materials which are to be used on the conversion are in inventory. The material could be used in the production of another good in place of material that the company would otherwise have to buy at a cost of $4,000. (b) Four workers would be required to complete the conversion. They would be from a department which is currently working well below full capacity. (c) The conversion work will require the use of machinery which cost $120,000 eight years ago. It has an estimated life of ten years. Depreciation is charged on a straight-line basis. (a) The conversion work will be supervised by a foreman who is currently employed by the company. The foreman receives a salary which is equivalent to $1,500 per month. It is estimated that conversion will occupy 10% of the foreman's time. (e) The conversion will take one month. (f) The original customer had paid a non-returnable deposit of $3,000. (g) It is the company policy to charge production with a proportion of general fixed overheads at an absorption rate of 40% of material costs. (h) In its existing condition the product could be sold for scrap, earning a revenue of $1,000 Required: Prepare calculation to show to the minimum price which you recommend the company to quote to the new customer. Assume that no other customer will be found. Give reasons for the inclusion or exclusion of items in your computation