Oilparts Brothers has been requested to tender for a one-off batch of 2,000 valves for the oil

industry. The batch is similar to items regularly made by Oilparts Brothers and the estimated

cost of the batch using current standards is as follows:

£

Materials Steel 1,000 kg at £26 per kg 26,000

Copper 250 kg at £44 per kg 11,000

Labour 0.5 hours per valve at £10 per hour 10,000

Overheads Variable 1,000 hrs at £2.50 per hour 2,500

Fixed 1,000 hours at £20.50 per hour 20,500

Total standard cost 70,000

The sales director does not believe that a tender at this price will be accepted and as there is

spare factory capacity, requested you to advise on a minimum price. Your investigations

revealed the following:

(i) The preliminary preparation of the tender had cost £500.

(ii) The 500 kg of the regularly used steel in stock cost £25 per kg. Its scrap value is £28

per kg and the current price is £30 per kg.

(iii) Copper is rarely used by Oilparts Brothers and the firm was planning to dispose of the

500 kg in stock as scrap at £32 per kg, which would be a saving of £12 per kg on the

purchase price.

(iv) Oilparts Brothers has spare labour capacity hired on permanent contracts. However,

to fit the batch, maintenance work on a copper extruder will need to be undertaken by

an outside contractor at a cost of £15,000.

(v) Variable overheads for this job are estimated at £1.50 per valve.

(vi) Fixed costs in the estimate are calculated using standard labour hours. The estimated

increase in fixed costs if the job was accepted is £4,500.

(vii) The sales department estimates that it will cost £2,000 to deal with the tender

submission.

Required:

Using relevant costing, advise on the minimum price that would be appropriate for the tender submission. You should detail all items and explain briefly why some are not incorporated into your calculations. Identify factors that should to be considered before using the minimum price for the tender submission.