Question

Soil Science Ltd. operates a soil sampling business targeting in particular the agri-environmental sector. It quotes prices for its work based on the cost of the fieldwork (retrieving soil samples, laboratory testing and producing reports), a share of the company’s overheads and a 20% mark-up on all costs.

Fieldwork costs are considered to be variable costs.

A recent soil sampling job had its price determined as follows: € Fieldwork costs: 300 samples @ €40 per sample 12,000 Share of fixed overhead costs 15,000 27,000 Mark-up at 20% 5,400 Standard quoted price 32,400


i. Restructure the data presented above to clearly show the contribution margin per sample and the contribution margin ratio per sample expected from the soil sampling job.

ii. Suppose that during a slack period of business the quotation of €32,400 noted above is rejected by a customer, who instead offers €24,500 to have the soil sampling job done.

Calculate the difference in the overall profit for Soil Science Ltd. between accepting and rejecting the offer of €24,500.

Should Soil Science Ltd. accept or reject the offer of €24,500 for the job? Explain briefly your decision.
iii. What is the minimum price that would be rational to quote for this soil sampling job?

iv. Discuss any drawbacks that you would associate with accepting a price lower than the standard quoted price

Answer 1

Data from the question
Particulars	Working	Amount	Nature of cost
Field Work Cost	300 samples *40	12000	Variable Cost
Fixed Overhead		15000	Fixed Cost
Total		27000
Mark up@20% on cost	27000*20%	5400
Standard Quoted Price		32400
Answer to (i)
Standard Quoted Price		32400
Less: Variable Cost		12000
Contribution for 300 Samples		20400
Contribution for 1 sample	20400/300	68
Contribution margin ratio	Contribution/Sale Price
	20400/32400*100	62.96
Answer to (ii)
Particulars	Workings	Profit if Accepted	Profit if Not Accepted
Sales Price		24500	0
Less: Variable Cost	No variable cost if quote not accepted	12000	0
Contribution		12500	0
Less: Fixed Cost		15000	15000
Profit		-2500	-15000
Since, there is less loss, if we accept the 24500 rate, hence it is recommended to accept the price of 24500
Answer to (iii)
Minimum price that would be rational to quote is Variable cost i.e. 12000. Since, fixed cost we have to incur for any quantity.
Answer to (iv)
The main drawback for accepting the price lower than the standard quoted price is, the profit will be reduced and the contribution margin also gets reduced