Karnage Ltd. is a private company owned and operated by husband and wife team Mike and...

 

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Karnage Ltd. is a private company owned and operated by husband and wife team Mike and Melissa Karnage. The couple have managed to build the company into a sizeable business, with a turnover approaching £50m, although it lacks a clear mission and they tend to take on opportunities that they see rather than focusing their expertise and competence in a particular area. Recently, Mike and Melissa have argued more about how the organisation should move forward. They currently have 140 employees working on various projects, with around 60% of their turnover relating to the manufacture of components for the offshore oil industry. This requires the use of expensive plant and machinery costing millions of pounds and needs a skilled workforce to operate it. Melissa is happiest with this element of the business and would like to develop it. Mike on the other hand is still very keen to take on a range of other projects, which span across retail, manufacturing and construction. He argues that the diversification of activity helps to reduce risk and gives them potential new areas of development. Melissa feels that the diversity is a distraction from oil industry component manufacturing that she argues is their core business and should be their main focus for development as it is both their largest activity and the one that has most reliably helped them achieve their required rate of return of 12%. The pair have recently been very busy and disagreements over what should be taken on have increased. They have employed you as a team of consultants to help them decide on the way forward. They have asked you to report on the following: Karnage have been asked to tender for a one-off construction project in Edinburgh. Mike is keen to tender for the project as they have some spare capacity when the project is due to take place. The firm's quantity surveyor has prepared the following data on the material requirements of the project: Material Quantity Cost Concrete 2,000 tons £200,000 Bricks 100,000 £20,000 Timber 6,000m £12,000 Plasterboard (coated) 1,600 sheets £18,880 All the above costs are based on the current purchase cost of the materials identified by the quantity surveyor from local sources. Karnage's stores manager has supplied some additional information on the materials required for this contract: 1. Concrete must be supplied freshly mixed. Karnage have negotiated a very good deal on concrete from a national supplier at £70/ton. However, they can deliver only 110 tons per day meaning that it will have to be diverted from another site currently under construction in Greenock. The site in Greenock is 11 days ahead of schedule and is using the full 110 tons per day of concrete. It is estimated that delays on the Greenock site will cost £1,200 per day. Due to the significant distance between the sites, the concrete can be delivered to only one site on any given day. 2. Bricks are a stock item for Kamage and are in constant use. The bricks currently in store are held in store at a weighted average cost of £180 per thousand. 3. The timber required for the contract is an unusual size not normally stocked by Kamage, but there are 2,900m of a larger size of timber left over from a contract three years previously that could be sawn by Kamage to make 5,000m of the size required. The work involved will require two men for two days and as they will have to be diverted from other paying work it is estimated that the lost contribution will be £1,900. The timber in store has a book value of £3,700, but the stores manager had been about to dispose of it for £2,700 to another local building firm. The plasterboard required for the contract has a special coating. Instead of buying the pre- coated boards as estimated for by the quantity surveyor, Karnage could apply the coating themselves to the standard boards, which they keep in stock for constant use, with workers that are currently idle. The estimated time involved with the coating of the boards is 200 hours and the workers involved are paid at the rate of £8.45/hour. The cost of the special paint for the whole job would be £3,700 and the standard boards are held in stock at a weighted average cost of £7.55 per board. The replacement cost per standard board is £8.22. Kamage's foreman has added that they expect to have sufficient labour for most of the contract, but that they will have to sub-contract an electrician at an estimated cost of £17,550. Alternatively, they could employ an electrician on a one year contract. This would cost £27,500, but the foreman states that the clectrician could also cover another contract the cost of which is £5,800. The foreman suggests that they may have other work for the electrician over the course of the year, but nothing is certain. Additionally, one of Karnage's site supervisors has just resigned. The Foreman has advised that due to the spare capacity they had not intended to seek a replacement in the short-term. He also adds that supervision on the Edinburgh contract is unlikely to be a problem as the other company's other supervisor can cover the project, although this will require payment of an overtime premium of £1,700. Advice required: Calculate the relevant cost of the contract to Kamage and state the minimum price that they should charge. Your answer should include an opinion on whether or not Karnage should sub- contract or employ an electrician. This opinion must be justified. Karnage Ltd. is a private company owned and operated by husband and wife team Mike and Melissa Karnage. The couple have managed to build the company into a sizeable business, with a turnover approaching £50m, although it lacks a clear mission and they tend to take on opportunities that they see rather than focusing their expertise and competence in a particular area. Recently, Mike and Melissa have argued more about how the organisation should move forward. They currently have 140 employees working on various projects, with around 60% of their turnover relating to the manufacture of components for the offshore oil industry. This requires the use of expensive plant and machinery costing millions of pounds and needs a skilled workforce to operate it. Melissa is happiest with this element of the business and would like to develop it. Mike on the other hand is still very keen to take on a range of other projects, which span across retail, manufacturing and construction. He argues that the diversification of activity helps to reduce risk and gives them potential new areas of development. Melissa feels that the diversity is a distraction from oil industry component manufacturing that she argues is their core business and should be their main focus for development as it is both their largest activity and the one that has most reliably helped them achieve their required rate of return of 12%. The pair have recently been very busy and disagreements over what should be taken on have increased. They have employed you as a team of consultants to help them decide on the way forward. They have asked you to report on the following: Karnage have been asked to tender for a one-off construction project in Edinburgh. Mike is keen to tender for the project as they have some spare capacity when the project is due to take place. The firm's quantity surveyor has prepared the following data on the material requirements of the project: Material Quantity Cost Concrete 2,000 tons £200,000 Bricks 100,000 £20,000 Timber 6,000m £12,000 Plasterboard (coated) 1,600 sheets £18,880 All the above costs are based on the current purchase cost of the materials identified by the quantity surveyor from local sources. Karnage's stores manager has supplied some additional information on the materials required for this contract: 1. Concrete must be supplied freshly mixed. Karnage have negotiated a very good deal on concrete from a national supplier at £70/ton. However, they can deliver only 110 tons per day meaning that it will have to be diverted from another site currently under construction in Greenock. The site in Greenock is 11 days ahead of schedule and is using the full 110 tons per day of concrete. It is estimated that delays on the Greenock site will cost £1,200 per day. Due to the significant distance between the sites, the concrete can be delivered to only one site on any given day. 2. Bricks are a stock item for Kamage and are in constant use. The bricks currently in store are held in store at a weighted average cost of £180 per thousand. 3. The timber required for the contract is an unusual size not normally stocked by Kamage, but there are 2,900m of a larger size of timber left over from a contract three years previously that could be sawn by Kamage to make 5,000m of the size required. The work involved will require two men for two days and as they will have to be diverted from other paying work it is estimated that the lost contribution will be £1,900. The timber in store has a book value of £3,700, but the stores manager had been about to dispose of it for £2,700 to another local building firm. The plasterboard required for the contract has a special coating. Instead of buying the pre- coated boards as estimated for by the quantity surveyor, Karnage could apply the coating themselves to the standard boards, which they keep in stock for constant use, with workers that are currently idle. The estimated time involved with the coating of the boards is 200 hours and the workers involved are paid at the rate of £8.45/hour. The cost of the special paint for the whole job would be £3,700 and the standard boards are held in stock at a weighted average cost of £7.55 per board. The replacement cost per standard board is £8.22. Kamage's foreman has added that they expect to have sufficient labour for most of the contract, but that they will have to sub-contract an electrician at an estimated cost of £17,550. Alternatively, they could employ an electrician on a one year contract. This would cost £27,500, but the foreman states that the clectrician could also cover another contract the cost of which is £5,800. The foreman suggests that they may have other work for the electrician over the course of the year, but nothing is certain. Additionally, one of Karnage's site supervisors has just resigned. The Foreman has advised that due to the spare capacity they had not intended to seek a replacement in the short-term. He also adds that supervision on the Edinburgh contract is unlikely to be a problem as the other company's other supervisor can cover the project, although this will require payment of an overtime premium of £1,700. Advice required: Calculate the relevant cost of the contract to Kamage and state the minimum price that they should charge. Your answer should include an opinion on whether or not Karnage should sub- contract or employ an electrician. This opinion must be justified.

Answer rating: 100% (QA)

Relevant cost of contract and minimum price 219792 Particulars Amount in Cost of concrete Cost of pu... View the full answer