Rainbow Nation Developers (RND) builds affordable environmentally friendly housing. High-quality materials are used and the company uses their own patented energy-saving technology. RND is planning to expand to a neighboring country and has been asked by the president of that country for a quotation to build a house. The directors of RND believe that if their quotation is successful, this could help them to launch their houses in that country and have come to an agreement to quote a price that will exactly cover its relevant cost.

The following information has been obtained with regards to the contract:

1. The CEO (Chief Executive Officer) and marketing manager recently met with the potential client to discuss the house. The meeting was held at a restaurant and RND provided food and drinks at a cost of R375.

2. 1 200 kg of Material B will be required for the house. RND currently has 550 kg of Material B in its inventory purchased for R58 per kg. Material X is regularly used by RND in its houses and has a current replacement cost of R65 per kg. The resale value of Material B in inventory is R35 per kg.

3. 400 hours of construction worker time are required to build the house.

4. The house will require 90 hours of engineer time. RND engineers are paid a monthly salary of R4 750 each and do not have any spare capacity. To meet the engineering requirement for the house RND can choose one of two options:
   1. Pay the engineers an overtime rate of R52 per hour to perform the additional work.
   2. Reduce the number of engineers' hours available for their existing job, the building of Product A. This would result in lost sales of Product A. Summary details of the existing job the engineers are working on:

Summary details at existing job

Information for one unit of Product A
Sales revenue	R4 860
Variable costs	R3 365
Engineers' time required per unit	30 hrs

5. A specialist machine would be required for 7 weeks to build the house. RND has 4 weeks remaining on the 15-week specialist machine rental contract that cost R15 000. The machine is currently not in use. The machine can be rented for an additional 15 weeks at a cost of R15 250. The specialist machine can only be rented in blocks of 15 weeks. Alternatively, a machine can be purchased for R160 000 and sold after the work on the house has been completed for R140 000.

6. The windows required for the house have recently been developed by RND and use the latest environmentally friendly insulating material. RND was planning to exhibit the windows at a house-building conference. The windows would only be used for display purposes at the conference and would not be for sale to prospective clients. RND has had assurances from three separate clients that they would place an order for 25 windows each if they saw the technology demonstrated at the conference. The contribution from each window is R10 450. If the windows are used for the contract, RND would not be able to attend the conference. The conference organizers will charge a penalty fee of R1 500 for non-attendance by RND. The CEO of RND can meet the clients directly and still secure the orders for the windows. The meetings would require two days of the CEO's time. The CEO is paid an annual salary of R414 000 and contracted to work 260 days per year.

7. The building of the house requires 400 kg of other materials. RND currently has none of these materials in its inventory. The total current purchase price for these other materials is R6 000.

8. RND's fixed absorption rate is R37 per construction worker hour.

9. RND's normal policy is to add a 12% mark-up to the cost of each house.

Required:

1. Produce a schedule that shows the minimum price that could be quoted for the contract to build the house.
2. Your schedule should show the relevant cost of each of the nine items identified above. You should also explain each relevant cost value you have included in your schedule, and why any values you have excluded are not relevant.
3. Explain the reasons why relevant costing may not be a suitable approach to pricing houses in the longer term for RND.
4. Recommend, with justifications, a pricing strategy for RND to use to price the Innovative, environmentally friendly houses when they are launched in the new country.

Answer rating: 100% (QA)

1 The schedule should show the relevant cost of each of the nine items identified above You should also explain each relevant cost value you have included in your schedule and why any values you have ... View the full answer