QUESTION ONE (Group 6) You have received a request from Zawadi plc to provide a quotation for the manufacture of a specialized piece of equipment. This would be a special order, in excess of normal budgeted production. The following cost estimate has already been prepared: Note (K) Direct materials: Steel 10 m at K5.00 per sq. metre 1 50 2 20 Brass fittings Direct labour Skilled 25 hours at K8.00per hour 3 200 Semi-skilled 10 hours at K5.00 per hour 4 50 Overhead 35 hours at K10.00 per hour 5 350 Estimating time 6 100 770 Administrative overhead at 20% of production cost 7 154 924 Profit at 25% of total cost 8 231 Selling price 1155 Notes 1. The steel is not used any more, and has to be disposed off at a cost K5.00 per sq. metre. There are currently 100 sq. metres in stock. The steel is readily available at a price of K5.50 per sq. metre. 2. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of K20 for the fittings required. 3. The skilled labour is currently employed by your company and paid at a rate of K8.00 per hour. If this job were undertaken it would be necessary either to work 25 hours overtime which would be paid at time plus one half or to reduce production of another product which earns a contribution of K13.00 per hour. 4. The semi-skilled labour currently has sufficient paid idle time to be able to complete this work. 5. The overhead absorption rate includes power costs which are directly related to machine usage. If this job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of K0.75 per hour. There are no other overhead costs which can be specifically identified with this job. 6. The cost of the estimating time is that attributed to the four hours taken by the engineers to analyse the drawings and determine the cost estimate given above. 7. It is company policy to add 20% on to the production cost as an allowance against administration costs associated with the jobs accepted. 8. This is the standard profit added by your company as part of its pricing policy. Required: (a) Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimate. (12 marks) (b) There may be a possibility of repeat orders fromZawadi plc which would occupy part of normal production capacity. What factors need to be considered before quoting for this order? (7 marks) c) When an organisation identifies that it has a single production resource which is in short supply, but is used by more than one product, the optimum production plan is determined by ranking the products according to their throughput per unit of the scarce resource. Using a numerical example of your own, reconcile this approach with the opportunity cost approach used in (a) above. (6 marks) (Total 25 marks)