Question

QUESTION 3

A friend of yours owns a kitchen manufacturing business in Limerick City called Blurred Kitchens Limited. The business employs twenty-six people and these comprise fully qualified carpenters, trainee carpenters, sales staff, delivery staff and administration staff. Your friend has recently received a job proposal from a large developer in Donegal to manufacture and fit kitchens for 25 houses in a housing estate in Donegal Town. The work will take eight weeks to fully complete. He has made out the following financial details for you to study and has asked you to write a formal consultancy report for which you will be financially rewarded. Raw materials

The chief raw material that Blurred Kitchens Limited uses in all its kitchens is an Indonesian timber. This timber will cost GH₵4,600 per kitchen. There is already, in stock, enough timber to make and fit 5 kitchens. This stock of timber had originally cost GH₵3,280 per kitchen but has since increased in price. Supplementary materials will cost GH₵98 per kitchen. There is sufficie nt stock of supplementary materials to be able to complete this job.

Labour

Three extra workers will need to be employed if this job goes ahead. One additional qualified carpenter will be paid GH₵900 per week for 8 weeks. Two additional unqualified carpenters will be paid GH₵410 each, per week, for 8 weeks. A supervisor carpenter, currently employed full- time, will need to spend 4 weeks supervising this job. He is currently paid GH₵1,100 per week. An administrative staff member who would generate income of GH₵240 per kitchen for the business by selling add-on products such as microwaves, will now have to be employed for 6 weeks on this particular job, and will not be able to perform his usual sales duties for the duration of the job. This staff member is currently a full-time employee and is paid a salary of GH₵690 per week.

Overheads

Production overheads are expected to be GH₵3,800 for this particular job, 75% of these costs will be fixed. A cutting machine with a net book value of GH₵290,000 will be needed. Straight line depreciation of 20% is applied to this machine. A truck that is currently rented out to a customer at GH₵515 per weekwill need to be diverted from this use. This truck has a depreciation charge of GH₵1,500 per month in the accounts of Blurred Kitchens Limited. A general overhead of GH₵400 per week is charged through the accounts of Blurred Kitchens Limited and will apply whether this particular job goes ahead or not.

Accounts department

The accounts department employs two staff. These are both paid GH₵45,000 per annum. This cost is treated as a fixed cost. One of the staff will need to work overtime for the entire length of the job. This overtime is usually GH₵220 per staff member per week. Advertising

An advertising campaign carried out by Blurred Kitchens Limited at the beginning of the current financial year, which may have sparked this interest from Donegal, has already cost GH₵18,200. Only 50% of this has been paid so far and the remainder will not be paid until the end of the year. Kitchen design

In order to impress the Donegal customer, the design of these particular kitchens were made by a graphic design firm in Ennis earlier in the year. These designs were more expensive than the more usual in –house designs. The costs for these designs came to GH₵3,900 in total and they will not be used for any other job.

Accommodation

Due to travelling a long distance for this particular job accommodation will be necessary. It is estimated that 8 employees will need to spend 42 nights each in a local hotel at a cost of GH₵ 48 per night each.

Payme nt

The developer has agreed to pay 25% of the job proposal in advance and the remainder will be paid 6 months after completion.

Mark up on total costs

A mark up of 150% on full costs is required on all jobs.

Re quire d:

a) Prepare a detailed report for Blurred Kitchens Limited, clearly explaining the basis for inclusion and exclusion of each element of costs for this job. b) Calculate the total cost and required mark-up of the above job. c) Discuss factors, other than costs, that should also be considered before this job can be accepted.

d) Discuss how Blurred Kitchens Limited may reduce the risks involved in the job.

Answer 1

Solution (a)

Detailed report of all the cost involced:

No. of Kitchens = 25

Currency Unit - GH₵

Timber, 4600 each = 4600 * 20 = 92000

Timber already in stock, 5 * 3280 = 16400

Supplementary Materials, 98 * 25 = 2450

Three extra workers -

1 additional qualified carpenter will be paid GH₵900 per week for 8 weeks = 900 * 8 = 7200

2 additional unqualified carpenters will be paid GH₵410 each, per week, for 8 weeks = 2 * 410 * 8 = 6560

A supervisor carpenter, currently employed fulltime, will need to spend 4 weeks supervising this job. He is currently paid GH₵1,100 per week = 1100 * 4 = 4400

Income generated by selling add-on products by the administrative staff = 240 * 25 * 6 = 36000

staff member is currently a full-time employee and is paid a salary of GH₵690 per week= 690 * 8 = 5520

Overheads, Fixed = 2850

Variable = 950

A cutting machine with a net book value of GH₵290,000

Depreciation 20% p.a, 8 weeks = 2 months = 3.33% = 9657

Truck Rental loss = 515 * 8 = 4120 ( 3000 (Depriciation) + 1120 (Rental Profit loss))

General Overhead = 400 * 8 = 3200

The accounts department employs two staff. These are both paid GH₵45,000 p.a. = 3750 * 2 * 2 = 15000

Overtime to the staff = 220 * 8 = 1760

Advertising cost can not be added as it is made by the company for promotion and same with the designs to impress the customer.

It is estimated that 8 employees will need to spend 42 nights each in a local hotel at a cost of GH₵ 48 per night each = 8 * 42 * 48 = 16128

Solution (b)

Total Costs Computed as follows:

Adding all the costs written in bold = 224195

Mark up of 150% of total cost = 224195*150% = 336292.5

Total Proposal = 560487.5

Solution (c)

Factors Other than cos that should be discussed before accepting the contract / job :

Defaults in payments, guarantee of the remaining payments after 6 months of the completion of the project, professionalism during the course of the project, etc

Solution (d)

Blurred Kitchens Limited may reduce the risks involved in the job by applying following method :

100% payment in advance or Cheques of the future dates whenever promised, sighed guarantor (maybe bank), etc.