IRECT has recently expanded its operations by manufacturing garden benches. One of their customers has asked them to prepare a fixed price quotation for the manufacture and supply of benches to a government department. If the quoted price is acceptable, it will result in sales of 4 000 benches. The benches will be made using spare capacity, which currently exists in IRECT's bench factory. The Finance Manager believes that the price of the benches should be
IRECT has recently expanded its operations by manufacturing garden benches. One of their customers has asked them to prepare a fixed price quotation for the manufacture and supply of benches to a government department. If the quoted price is acceptable, it will result in sales of 4 000 benches. The benches will be made using spare capacity, which currently exists in IRECT's bench factory. The Finance Manager believes that the price of the benches should be
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Calculate the price per bench to be quoted, using the Finance Manager’s suggested approach of activity based costing
Transcribed Image Text:### IRECT Garden Bench Price Quotation Analysis
#### Introduction
IRECT has recently expanded its operations by manufacturing garden benches. A customer has requested a fixed price quotation for the manufacture and supply of benches to a government department. If accepted, this would result in the sale of 4,000 benches, utilizing the existing spare capacity in IRECT’s bench factory.
#### Pricing Strategy
The Finance Manager suggests using an activity-based cost-plus approach to determine the bench price, proposing a 20% mark-up on the total cost. The following information has been collected for the quotation:
#### Direct Costs Per Bench
| Cost Component | Calculation |
| --- | --- |
| **Wood** | Three metres at R120 per metre |
| **Fittings** | R60 per bench |
| **Labour** | Six hours at R150 per hour |
#### Overheads
All 4,000 benches will be produced in one production run. The factory overheads analysis, including the expectation from the government order, is as follows:
##### Overhead Breakdown
| Overhead Item | Cost Per Annum (R) | Cost Driver | Driver Activity Per Annum |
| --- | --- | --- | --- |
| **Material Storage and Handling** | 25,000,000 | Wood metres | 500,000 metres |
| **Machine Setup Costs** | 10,000,000 | Production runs | 200 runs |
| **Packaging and Delivery** | 1,500,000 | Benches delivered | 150,000 benches |
This detailed breakdown allows IRECT to precisely calculate the actual costs involved and determine an accurate price for the government order, factoring in the overheads and the planned mark-up.
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