Question:

Preston Concrete is a major supplier of concrete to residential and commercial builders in the Pacific Northwest. The company's policy is to price deliveries at25 percent over full cost per cubic yard(including an allowance for administrative costs).Unitfixed costs are calculated at the beginning of the year using estimated cubic yards to determine the full cost unit price.

At the start of 2016, the company estimated total annual costs as follows:

Material Costs $75/cubic yard.

Delivery Costs ($500,000/year) + ($10/mile) + ($50/truck hour)

Yard Operation Costs ($300,000) + $17/cubic yard

Administrative Costs $2,000,000/year

Source: Flexible budget 2016

Using ABC concepts, delivery costs include a rate/mile recognizing that more miles result in more gas and maintenance costs, and a rate per truck hour since, even if a delivery truck is kept waiting at a jobsite, the truck must be kept running so the concrete mix will not solidify and the driver must be paid.

At the start of 2016, the company estimated that it would deliver 500,000 cubic yards.

Required:

1-Calculate the full cost unit price. (Calculate unit cost by total per cubic yard, total per mile, and total per hour).

2-On October 28, Fairview Construction Company asked Preston to deliver6,000 cubic yards of concrete. The job will require driving8,400 milesand300 truck hours. What will the total price and unit price (based on cubic yards) be if Preston follows its normal pricing policy (using the unit costs calculated above and include a 25% mark up for administrative costs)?

2-A sharp increase in interest rates had reduced housing starts and the demand for concrete. Fairview has indicated that it will sign a firm order agreement for the delivery of the concrete only if the price is $115/cubic yard. Should Preston accept this order? Why or why not? Briefly indicate factors that, while hard to quantify, that should be taken into account in this decision. Your answer should be 1-2 well thought out paragraphs using information from the case.