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using a numerical example of your own reconcile this approach with the opportunity c 610125

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:

(£)

Direct materials:

Steel

10 m2 at £5.00 per sq. metre

50

Brass fittings

20

Direct labour Skilled

25 hours at £8.00 per hour

200

Semi-skilled

10 hours at £5.00 per hour

50

Overhead

35 hours at £10.00 per hour

350

Estimating time

100

770

Administrative overhead at 20% of

production cost

154

924

Profit at 25% of total cost

231

Selling price

1155

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.

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