BMX Ltd is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions and extensions to properties and have found that they are winning fewer garage conversion contracts than expected. BMX has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BMX thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to garage conversion and hence make them more competitive. The following data is provided, Overhead category Annual Overhead in Ksh Activity driver Total number of activities per year Supervisors 80,000 Site visits 495 Planners 60,000 Planning documents 245 Property related 230,000 Labour hours 35,000 Total 370,000 A typical Garage conversion costs Sh3,500 in materials and takes 300 labour hours to complete. A Garage conversion requires only one site visit by a supervisor and needs only one planning document to be raised. The typical extension to properties costs sh8,000 in materials and takes 500 hours to complete. An extension to properties requires six site visits and ﬁve planning documents. In all cases labour is paid sh15 per hour. Required: Calculate the cost and quoted price of a Garage Conversion and of an Extension to properties using labour hours to absorb the overheads. Calculate the cost and the quoted price of a Garage conversion and of an Extension to properties using ABC to absorb the overheads. Assuming that the cost of a Garage conversion falls by nearly 7% and the price of an Extension to properties rises by about 2% as a result of the change to ABC, suggest possible pricing strategies for the two products that BMX sells and suggest two reasons other than high prices for the current poor sales of the Garage Conversion.

BMX Ltd is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions and extensions to properties and have found that they are winning fewer garage conversion contracts than expected. BMX has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BMX thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to garage conversion and hence make them more competitive. The following data is provided, Overhead category Annual Overhead in Ksh Activity driver Total number of activities per year Supervisors 80,000 Site visits 495 Planners 60,000 Planning documents 245 Property related 230,000 Labour hours 35,000 Total 370,000 A typical Garage conversion costs Sh3,500 in materials and takes 300 labour hours to complete. A Garage conversion requires only one site visit by a supervisor and needs only one planning document to be raised. The typical extension to properties costs sh8,000 in materials and takes 500 hours to complete. An extension to properties requires six site visits and ﬁve planning documents. In all cases labour is paid sh15 per hour. Required: Calculate the cost and quoted price of a Garage Conversion and of an Extension to properties using labour hours to absorb the overheads. Calculate the cost and the quoted price of a Garage conversion and of an Extension to properties using ABC to absorb the overheads. Assuming that the cost of a Garage conversion falls by nearly 7% and the price of an Extension to properties rises by about 2% as a result of the change to ABC, suggest possible pricing strategies for the two products that BMX sells and suggest two reasons other than high prices for the current poor sales of the Garage Conversion.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The following data is provided,

Overhead category	Annual Overhead in Ksh	Activity driver	Total number of activities per year
Supervisors	80,000	Site visits	495
Planners	60,000	Planning documents	245
Property related	230,000	Labour hours	35,000
Total	370,000

A typical Garage conversion costs Sh3,500 in materials and takes 300 labour hours to complete. A Garage conversion requires only one site visit by a supervisor and needs only one planning document to be raised. The typical extension to properties costs sh8,000 in materials and takes 500 hours to complete. An extension to properties requires six site visits and ﬁve planning documents. In all cases labour is paid sh15 per hour.

Required:

Calculate the cost and quoted price of a Garage Conversion and of an Extension to properties using labour hours to absorb the overheads.
Calculate the cost and the quoted price of a Garage conversion and of an Extension to properties using ABC to absorb the overheads.
Assuming that the cost of a Garage conversion falls by nearly 7% and the price of an Extension to properties rises by about 2% as a result of the change to ABC, suggest possible pricing strategies for the two products that BMX sells and suggest two reasons other than high prices for the current poor sales of the Garage Conversion.

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