solution

The Ahsan Co. makes beds. It has recently received a request from a customer to provide a one-off order of sofas, in excess of normal production. The following notes are relevant:

Notes:

1. The fabric is regularly used by Ahsan Co. There are currently 200 m2 in inventory, which cost Rs.18 per m2. The current purchase price of the fabric is Rs.18.50 per m2. 400 m2 of fabric is required for the project.

2. Wood is regularly used by the Co. and usually costs Rs.8.20 per m2. However, the company’s current supplier’s earliest delivery time for the wood is in three weeks’ time. An alternative supplier could deliver immediately but they would charge Rs.8.50 per m2. Ahsan Co. already has 1000 m2 in inventory but 980 m2 of this is needed to complete other existing orders in the next two weeks. The remaining 20 m2 is not going to be needed until four weeks’ time. 100 m2 of wood will be required by the project.

3. 400 hours of skilled labor is needed. The skilled labor force is employed under permanent contracts of employment under which they must be paid for 40 hours’ per week’s labor, even if their time is idle due to absence of orders. Their rate of pay is Rs.20 per hour, although any overtime is paid at double. In the next two weeks, there is spare capacity of 300 labor hours.

4. 600 hours of semi-skilled hours is required. There is no spare capacity for semi-skilled workers. They are currently paid Rs.16 per hour or double for overtime. However, a local agency can provide additional semi-skilled workers for Rs.20 per hour.

5. Rs.5 absorption rate is standard factory over head absorption rate; Rs.2.50 per hour reflects the cost of the factory supervisor’s salary and the other Rs.2.50 per hour reflects general factory costs. The supervisor is paid an annual salary and is also paid Rs.16 per hour for any over time he works. He will need to work 20 hours’ overtime if this order is accepted.

Required:

Prepare, on a relevant cost basis, the lowest cost estimate which could be used as the basis for the quotation. Explain briefly your reasons for including or excluding each of the costs in your estimate.