mitments, some overtime working would be required to complete the printing of the pamphlet. A trainee has produced the following cost
You are the
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 notes are relevant to the cost estimate above:
(1) The paper to be used is currently in stock at a value of £5,000. It is of an unusual specification (texture and weight) and has not been used for some time. The replacement price of the paper is £9,000, whilst the scrap value of that in stock is £2,500. The stores manager does not foresee any alternative use for the paper if it is not used on the pamphlet.
(2) The inks required are presently not held in stock. They would have to be
purchased in bulk at a cost of £3,000. 80% of the ink purchased would be used in producing the pamphlet. There is no foreseeable alternative use for the remaining unused ink.
(3) Highly skilled direct labour is in short supply, and the factory labour is already being utilised at full capacity, therefore, to accommodate the production of the pamphlet, 50% of the time required would be worked at weekends for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is £4.00 per hour.
(4) Semi-skilled labour is presently under-utilised, and 200 hours per week are currently recorded as idle time. If the printing work is carried out, 25 unskilled hours would have to occur during the weekend, but the employees concerned would be given two hours time off during the week in lieu of each hour worked at the weekend.
(5) Variable
(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 discussions with the organisation concerning the printing of its pamphlet.
Required:
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 (must).
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