Calculation of minimum selling price
You have received a request from EXE plc to provide a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared:
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(£) |
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Direct materials: |
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Steel |
10 m2 at £5.00 per sq. metre |
50 |
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Brass fittings |
20 |
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Direct labour Skilled |
25 hours at £8.00 per hour |
200 |
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Semi-skilled |
10 hours at £5.00 per hour |
50 |
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Overhead |
35 hours at £10.00 per hour |
350 |
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Estimating time |
100 |
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770 |
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Administrative overhead at 20% of |
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production cost |
154 |
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924 |
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Profit at 25% of total cost |
231 |
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Selling price |
1155 |
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Notes: |
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.
(b) There may be a possibility of repeat orders from EXE plc which would occupy part of normal production capacity. What factors need to be considered before quoting for this order?
(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 contribution 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.