Astra Controls Ltd, an electronic engineering business, that specializes in the production of electronic surveillance equipment...

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Astra Controls Ltd, an electronic engineering business, that specializes in the production of electronic surveillance equipment for security forces throughout the world. Recently, it has received a request to produce 10 'Peeping Tom' surveillance units for a foreign government. The Peeping Tom was developed some time ago by the business at a total research and development cost of $220,000. So far, there has been no interest shown in the equipment and no units have been produced. The present order seems likely to represent the total sales for the Peeping Tom. The product specification for each unit is set out below: 1. Materials (a) Component A 3 per unit Component B 1 per unit Component C 2 per unit (b) Component A is normally held in inventories as it is widely used throughout the business's product range. There are 15 components currently in inventories. These had cost $1,800 each. The sole supplier of this component has announced an immediate price rise of 5% for further purchases. (c) Component B is no longer used for any other of the business's products. At present the business holds six components that had cost $2,000 each. It is possible to buy additional components at a cost of $2,200 each, however, the supplier insists on a minimum order quantity of six components. Any components that are not used on this contract will be disposed of at a total cost to the business of $250, irrespective of the quantity to be disposed of. (d) Component C is used by the business throughout its product range. At present there is none in inventories. However, an order for 20 components for use in another contract is about to be placed. The supplier normally charges $1,600 per component but for orders above 30 components a discount of 10% is available on the total order price. (e) Additional materials costing $2,800 in total will have to be bought if the contract is undertaken. 2. Labor (a) Assembly time is estimated at 10 hours for each Peeping Tom unit. The workforce required to assemble the product is paid $7.00 an hour and is in great demand. If the order is accepted the necessary labor will have to be transferred from existing work and, as a result, other orders will be lost. It is estimated that for each hour that labor is transferred to this product $50.00 of sales revenue will be lost but that savings of $15.00 an hour in materials relating to lost sales will be made. (b) Inspection time is estimated at five hours for each Peeping Tom unit. Inspection labor can be provided by paying existing employees overtime which is paid at a 33.33% premium over the standard rate of $6.00 an hour. 3. Overheads The business normally includes a mark-up of 30% to cover overheads. This contract is not expected to give rise to any increases in overheads. Required: Prepare an estimate of the absolute minimum price that Astra Controls Ltd could undertake the contract so as to leave the business no worse off as a result. Your answer should clearly explain your treatment of all of the information given in the question. Astra Controls Ltd, an electronic engineering business, that specializes in the production of electronic surveillance equipment for security forces throughout the world. Recently, it has received a request to produce 10 'Peeping Tom' surveillance units for a foreign government. The Peeping Tom was developed some time ago by the business at a total research and development cost of $220,000. So far, there has been no interest shown in the equipment and no units have been produced. The present order seems likely to represent the total sales for the Peeping Tom. The product specification for each unit is set out below: 1. Materials (a) Component A 3 per unit Component B 1 per unit Component C 2 per unit (b) Component A is normally held in inventories as it is widely used throughout the business's product range. There are 15 components currently in inventories. These had cost $1,800 each. The sole supplier of this component has announced an immediate price rise of 5% for further purchases. (c) Component B is no longer used for any other of the business's products. At present the business holds six components that had cost $2,000 each. It is possible to buy additional components at a cost of $2,200 each, however, the supplier insists on a minimum order quantity of six components. Any components that are not used on this contract will be disposed of at a total cost to the business of $250, irrespective of the quantity to be disposed of. (d) Component C is used by the business throughout its product range. At present there is none in inventories. However, an order for 20 components for use in another contract is about to be placed. The supplier normally charges $1,600 per component but for orders above 30 components a discount of 10% is available on the total order price. (e) Additional materials costing $2,800 in total will have to be bought if the contract is undertaken. 2. Labor (a) Assembly time is estimated at 10 hours for each Peeping Tom unit. The workforce required to assemble the product is paid $7.00 an hour and is in great demand. If the order is accepted the necessary labor will have to be transferred from existing work and, as a result, other orders will be lost. It is estimated that for each hour that labor is transferred to this product $50.00 of sales revenue will be lost but that savings of $15.00 an hour in materials relating to lost sales will be made. (b) Inspection time is estimated at five hours for each Peeping Tom unit. Inspection labor can be provided by paying existing employees overtime which is paid at a 33.33% premium over the standard rate of $6.00 an hour. 3. Overheads The business normally includes a mark-up of 30% to cover overheads. This contract is not expected to give rise to any increases in overheads. Required: Prepare an estimate of the absolute minimum price that Astra Controls Ltd could undertake the contract so as to leave the business no worse off as a result. Your answer should clearly explain your treatment of all of the information given in the question.

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