You are the management accountant of a publishing and printing company which has been asked to quote for the production of a programmer for the local village fair. The work would be carried
out in addition to the normal work of the company. Because of existing commitments, some weekend working would be required to complete the printing of the programmer. A trainee accountant has produced the following cost estimate based upon the resources as specified by the production manager:

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 are relevant to the cost estimate above:
1 The paper to be used is currently in stock at a value of £5000. It is of an unusual colour which has not been used for some time. The replacement price of the paper is £8000, while the scrap value of that in stock is £2500. The production manager does not foresee any alternative use for the paper if it is not used for the village fair programmers'.
2 The inks required are not held in stock. They would have to be purchased in bulk at a cost of £3000. Eighty per cent of the ink purchased would be used in printing the programmer. No other use is foreseen for the remainder.
3 Skilled direct labour is in short supply, and to accommodate the printing of the programmes, 50 per cent of the time required would be worked at weekends, for which a premium of 25 per cent above the normal hourly rate is paid. The normal hourly rate is £14.00 per hour.
4 Unskilled labour is presently under-utilized, and at present 200 hours per week are recorded as idle time. If the printing work is carried out at a weekend, 25 unskilled hours would have to occur at this time, but the employees concerned would be given two hours' time off (for which they would be paid) in lieu of each hour worked.
5 Variable overhead represents the cost of operating the printing press and binding machines.
6 When not being used by the company, the printing press is hired to outside companies for £6.00 per hour. This earns a contribution of £3.00 per hour. There is unlimited demand for this facility.
7 Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.
8 The cost of the estimating department represents time spent in discussion with the village fair committee concerning the printing of its programme.
Required:
(a) Prepare a revised cost estimate using the opportunity cost approach, showing clearly the minimum price that the company should accept for the order. Give reasons for each resource valuation in your cost estimate.

Transcribed Image Text:

Direct materials: paper (book value) inks (purchase price) Direct labour skilled 250 hours at £14.00 unskilled 100 hours at £12.00 Variable overhead 350 hours at £4.00 Printing press depreciation 200 hours at £2.50 Fixed production costs 350 hours at £6.00 Estimating department costs 5000 2400 3500 1200 1400 500 2100 400 16 500