You are the management accountant of a confectionery company which has been asked to quote for the making of custom chocolates for a big wedding ceremony to be held. The work would be carried out in addition to the normal work of the company. Because of existing commitments, some weekend work would be required to complete the customized chocolates. A trainee accountant has produced the following cost estimate based upon the resources as specified by the production manager:

Direct Materials

Chocolate

Colouring and decor

Direct Labour

Skilled 250 hours at R40.00 per hour

Unskilled 100 hours at R30.50 an hours

Variable Manufacturing Overheads

350 hours at R40.00

Chocolate Melt n Mould Machine

Not e

1 2

3 4

5 7

8 9

R

9 000 4 500

10 000 3 050

14 000 5 000

21 000 500 67 050

Depreciation- 200 hours at R25.00 per hr

Fixed Production Costs

350 hours at R60.00 per hours Estimating department costs Estimated Cost

You are aware that considerable publicity could be obtained for the company if you are able to win this order and the price quoted must be very competitive.

The following information relates to the cost estimate above:

1. The chocolate to be used is currently in stock at a value of R9 000. The batch is nearing expiry. The replacement price of the chocolate is R12 000, while its scrap value is 25% of its replacement cost. The production manager does not foresee any alternative use for this type of chocolate if it is not used for the customised order.

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BACHELOR OF COMMERCE IN ACCOUNTING YEAR 3 ACADEMIC AND ASSESSMENT CALENDAR ____________________________________________________________________________________________

2. The colouring and decor required are not held in stock. They would have to be purchased in bulk at a cost of R5 000. 90% of the colouring would be used for this order. No other use

is foreseen for the remainder.

3. Skilled labour is underemployed and is only paid for hours worked. However,

If this custom job is accepted, not only will they become fully employed but

50% of the time required would be worked at weekends, for which a Premium of 25% above the normal hourly rate is paid. The norm al hourly rate is R40.00 per hour.

4. Unskilled labour is presently under-utilized and 200 hours per week is recorded as idle time for which the labourers are however paid. If the printing work is carried out on the weekend, 25 unskilled hours will be worked during this time. The employees concerned would be given two hours time off in lieu of each hour worked on the weekend. The time off will reduce idle time currently being experienced.

5. Variable overheads represent the cost of operating the chocolate melt n mould machine.

6. When not being used by the company, the chocolate melt n mould machine is hired to outside companies for R60.00 per hour. This earns a contribution of R30.00 per hour. There is unlimited demand for this facility.

7. Depreciation represents the estimated loss in market value per hour of usage.

8. Fixed production costs are absorbed into production using predetermined hourly rates.

9. The estimating costs are an allocation of the department's existing costs based on time spent in discussions with the couple in designing and tasting the chocolate samples.

10. The company's policy is to apply a 20% mark-up on total production costs to recover administration costs and then to have a profit equal to 20% of the selling price. However, as the company would like to secure the order, the mark-up to recover the administration costs will remain, but the profit mark-up will be 10% of the selling price.

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BACHELOR OF COMMERCE IN ACCOUNTING YEAR 3 ACADEMIC AND ASSESSMENT CALENDAR ____________________________________________________________________________________________

Required:

1.1. Calculate the minimum selling price that the company should quote for the order. Give reasons for your inclusion or exclusion of all costs given in the question.

(35)

1.2. List five qualitative factors which should be considered when making the decision.

(10)

1.3. Explain what a limiting or key factor is and give three examples of limiting factors

in a business environment.