Lomond Ltd is a manufacturer of various types of furniture units. Recently one of its large...

 

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Lomond Ltd is a manufacturer of various types of furniture units. Recently one of its large customers, Bamboo Ltd has offered a contract to Lomond Ltd for the supply of 500 units. Below are the details for the production: Material A: Each unit requires 7kg of this material. Currently 2,400 kg of Material A is held by the business and it is regularly used by the business. This material of was originally bought for £40 per kg. It would cost £47 per kg to replace it. Sales value is £43 per kg. Material B: Each unit requires 3kg of this material. Currently 2,000 kg of Material B is held by the business. This material was originally bought for £24 per kg. The material is not currently used by the business and its scrap value is £14 per kg. The only foreseeable alternative use is as a substitute for material D (in constant use) but this would involve further processing cost of £6 per kg. The current buying cost of material D is £18 per kg. Replacement cost for material B is £26 per kg. Skilled labour: Each unit requires 8 hours of skilled labour. It is currently paid at a rate of £18 an hour and skilled labour is hired on a permanent basis. 1,200 hours can be provided by members of staff who currently have no work to do due to a quiet time. Only taking staff off other work can provide the remaining hours needed for this new project. This other work is charged out to customers at £45 an hour and material cost is £8 per hour. Equipment: It cost £800,000 when it was bought 5 years ago. Current depreciation charge per year is £40,000 per year. At present, it is be rented out generating income of £70,000 per year. This equipment is needed for one year in this new project. Overheads: It is a company policy to charge a fair share of the general costs (rent, heating and so on) to each contract undertaken at the rate of £4 for each skilled labour hour used on the contract. If this project is undertaken, the general costs are expected increase by £1,750 as a result of undertaking the contract. Required Calculate the minimum price at which the contract could be undertaken by Lomond Ltd. For each part, you should clearly show supporting workings and provide a brief explanation for your choice.(Total: 30 marks) Lomond Ltd is a manufacturer of various types of furniture units. Recently one of its large customers, Bamboo Ltd has offered a contract to Lomond Ltd for the supply of 500 units. Below are the details for the production: Material A: Each unit requires 7kg of this material. Currently 2,400 kg of Material A is held by the business and it is regularly used by the business. This material of was originally bought for £40 per kg. It would cost £47 per kg to replace it. Sales value is £43 per kg. Material B: Each unit requires 3kg of this material. Currently 2,000 kg of Material B is held by the business. This material was originally bought for £24 per kg. The material is not currently used by the business and its scrap value is £14 per kg. The only foreseeable alternative use is as a substitute for material D (in constant use) but this would involve further processing cost of £6 per kg. The current buying cost of material D is £18 per kg. Replacement cost for material B is £26 per kg. Skilled labour: Each unit requires 8 hours of skilled labour. It is currently paid at a rate of £18 an hour and skilled labour is hired on a permanent basis. 1,200 hours can be provided by members of staff who currently have no work to do due to a quiet time. Only taking staff off other work can provide the remaining hours needed for this new project. This other work is charged out to customers at £45 an hour and material cost is £8 per hour. Equipment: It cost £800,000 when it was bought 5 years ago. Current depreciation charge per year is £40,000 per year. At present, it is be rented out generating income of £70,000 per year. This equipment is needed for one year in this new project. Overheads: It is a company policy to charge a fair share of the general costs (rent, heating and so on) to each contract undertaken at the rate of £4 for each skilled labour hour used on the contract. If this project is undertaken, the general costs are expected increase by £1,750 as a result of undertaking the contract. Required Calculate the minimum price at which the contract could be undertaken by Lomond Ltd. For each part, you should clearly show supporting workings and provide a brief explanation for your choice.(Total: 30 marks)

Answer rating: 100% (QA)

Solution to part a As the material X is of regular use to company and it should also provide that material to Altany Ltd the relevant cost will be equ... View the full answer