III. John, a builder, has been asked to provide a fixed price quotation for some building...

  

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III. John, a builder, has been asked to provide a fixed price quotation for some building work required by a customer. His cost accountant has compiled the following figures, together with some notes as a basis for a quotation. IV. Direct materials: Bricks 200,000 at RM100 per thousand 200,000 at RM120 per thousand Other materials Direct labour. Skilled 3,200 hours at RM12 per hour Unskilled 2,000 hours at RM6 per hour Other costs: Scaffolding hire Depreciation of general purpose machinery General overheads 5,200 hours at RM1 per hour Plans Total cost Profit Suggested price RM 20,000 24,000 5,000 38,400 12,000 Note T II 11 2 Notes 1. The contract requires 400,000 bricks, 200,000 are already in stock and 200,000 will have to be bought in. 3,500 V 2,000 VI 5,200 VII 2,000 VII 112,100 22,420 Xx 134,520 This is a standard type of brick regularly used by John. The 200,000 in stock were purchased earlier in the year at RM100 per 1,000. The current replacement cost of this type of brick is RM120 per 1,000. If the bricks in stock are not used on this job John is confident that he will be able to use them later in the year. Other materials will be bought in as required; this figure represents the purchase price. John will need to be on site whilst the building work is performed. He therefore intends to do 800 hours of the skilled work himself. The remainder will be hired on an hourly basis. The current cost of skilled workers is RM12 per hour. If John does not undertake the building work for this customer he can either work as a skilled worker for other builders at a rate of RM12 per hour or spend the 800 hours completing urgently needed repairs to his own house. He has recently had a quotation of RM12,000 for labour to repair his home. John employs four unskilled workers on contracts guaranteeing them a 40 hour week at RM6 per hour. These unskilled labourers are currently idle and would have sufficient spare time to complete the proposal under consideration. V. VI. VII. This is the estimated cost of hiring scaffolding. John estimates that the project will take 20 weeks to complete. This represents 20 weeks' straight-line depreciation on equipment used. If the equipment is not used on this job it will stand idle for the 20 week period. In either case its value at the end of the 20 week period will be identical. This represents the rental cost of John's storage yard. If he does not undertake the above job he can rent his yard out to a competitor who will pay him rent of RM500 per week for the 20 week period. VIII. This is the cost of the plans that John has already had drawn for the project. IX. John attempts to earn a mark up of 20% on cost on all work undertaken. John is surprised at the suggested price and considers it rather high. He knows that there will be a lot of competition for the work. Required: Using relevant costing principles, calculate the lowest price that John could quote for the customer's building work. Explain your treatment of each item in the accountant's estimate. m III. John, a builder, has been asked to provide a fixed price quotation for some building work required by a customer. His cost accountant has compiled the following figures, together with some notes as a basis for a quotation. IV. Direct materials: Bricks 200,000 at RM100 per thousand 200,000 at RM120 per thousand Other materials Direct labour. Skilled 3,200 hours at RM12 per hour Unskilled 2,000 hours at RM6 per hour Other costs: Scaffolding hire Depreciation of general purpose machinery General overheads 5,200 hours at RM1 per hour Plans Total cost Profit Suggested price RM 20,000 24,000 5,000 38,400 12,000 Note T II 11 2 Notes 1. The contract requires 400,000 bricks, 200,000 are already in stock and 200,000 will have to be bought in. 3,500 V 2,000 VI 5,200 VII 2,000 VII 112,100 22,420 Xx 134,520 This is a standard type of brick regularly used by John. The 200,000 in stock were purchased earlier in the year at RM100 per 1,000. The current replacement cost of this type of brick is RM120 per 1,000. If the bricks in stock are not used on this job John is confident that he will be able to use them later in the year. Other materials will be bought in as required; this figure represents the purchase price. John will need to be on site whilst the building work is performed. He therefore intends to do 800 hours of the skilled work himself. The remainder will be hired on an hourly basis. The current cost of skilled workers is RM12 per hour. If John does not undertake the building work for this customer he can either work as a skilled worker for other builders at a rate of RM12 per hour or spend the 800 hours completing urgently needed repairs to his own house. He has recently had a quotation of RM12,000 for labour to repair his home. John employs four unskilled workers on contracts guaranteeing them a 40 hour week at RM6 per hour. These unskilled labourers are currently idle and would have sufficient spare time to complete the proposal under consideration. V. VI. VII. This is the estimated cost of hiring scaffolding. John estimates that the project will take 20 weeks to complete. This represents 20 weeks' straight-line depreciation on equipment used. If the equipment is not used on this job it will stand idle for the 20 week period. In either case its value at the end of the 20 week period will be identical. This represents the rental cost of John's storage yard. If he does not undertake the above job he can rent his yard out to a competitor who will pay him rent of RM500 per week for the 20 week period. VIII. This is the cost of the plans that John has already had drawn for the project. IX. John attempts to earn a mark up of 20% on cost on all work undertaken. John is surprised at the suggested price and considers it rather high. He knows that there will be a lot of competition for the work. Required: Using relevant costing principles, calculate the lowest price that John could quote for the customer's building work. Explain your treatment of each item in the accountant's estimate. m

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To calculate the lowest price that John could quote for the customers building work we need to analyze the relevant costs and make adjustments for any ... View the full answer