Relevant cost
Millennium plc has been invited to submit a price for an order for 2,500 units of GX1. The company only makes GX1 to order and currently has no other orders in process. The production requirements for GX1 are as follows:
Materials: Three types of material are used in production:
Amount Cost Resale Current used per unit price value price to buy
Material A 12kg £2.50 £1.00 £2.75
Material B 4kg £7.00 £5.50 £8.50
Material C 6kg - £6.50 -
Material A is used extensively throughout the company’s range of products. Current stocks are 40,000kg and it is freely available in the market.
Material B is used infrequently. The company has 3,500kg in stock which it was planning to sell due to its perishable nature.
Material C is a by-product from another processing department. It is sometime sold on the open market, but most manufacturers produce for their own use, and Millennium does not have an alternative source of supply. The company uses this material in a product called Axim which as well as using 8kg of material C, has another £32 of variable costs and sells for £90.
Labour
To make each unit of GX1, six hours of one type of labour are required. The company currently pays these workers £10 per hour. Although they are fully occupied, at present, it is estimated that these workers could be persuaded to work up to 17,000 hours of overtime at one and a half times the normal wage rate. No more skilled workers can be recruited so other production time required will have to be transferred from a product which is priced at £48 per unit with variable costs of £38 and requiring one hour of skilled labour per unit.
Overheads
The overheads incurred depend on the overall level of operations of the plant. Without this contract the plant will be operating at 70% capacity and incurring variable overheads of £6 per hour. The contract would extend operations to 82% of the plant’s capacity and produce efficiencies in variable
Materials: Three types of material are used in production:
Amount Cost Resale Current used per unit price value price to buy
Material A 12kg £2.50 £1.00 £2.75
Material B 4kg £7.00 £5.50 £8.50
Material C 6kg - £6.50 -
Material A is used extensively throughout the company’s range of products. Current stocks are 40,000kg and it is freely available in the market.
Material B is used infrequently. The company has 3,500kg in stock which it was planning to sell due to its perishable nature.
Material C is a by-product from another processing department. It is sometime sold on the open market, but most manufacturers produce for their own use, and Millennium does not have an alternative source of supply. The company uses this material in a product called Axim which as well as using 8kg of material C, has another £32 of variable costs and sells for £90.
Labour
To make each unit of GX1, six hours of one type of labour are required. The company currently pays these workers £10 per hour. Although they are fully occupied, at present, it is estimated that these workers could be persuaded to work up to 17,000 hours of overtime at one and a half times the normal wage rate. No more skilled workers can be recruited so other production time required will have to be transferred from a product which is priced at £48 per unit with variable costs of £38 and requiring one hour of skilled labour per unit.
Overheads
The overheads incurred depend on the overall level of operations of the plant. Without this contract the plant will be operating at 70% capacity and incurring variable overheads of £6 per hour. The contract would extend operations to 82% of the plant’s capacity and produce efficiencies in variable