Reference no: EM132813983

Question - Motherboards Ltd produces electronic 'mother' boards for the computer industry. Motherboards Ltd has been offered a contract to supply 20,000 units of a customer-designed board. The company is interested in this contract as it is currently operating below capacity and has not had any previous dealings with this customer. The customer has said that more regular business may follow if this contract is successful. The company has received the customer design specification and has gathered the following data relating to the contract.

-Each board will require the following materials: 1 x C-architecture boards

2 x AMD Z2 processors

10 x R105 capacitors

-There are currently 12,000 C-architecture boards in stock that were purchased for £4 per board. This board has not been used recently and could be sold to an outside contractor for £4.50 per board. The replacement cost of these boards is now £6 per board.

-The AMD Z2 processors are currently used by all production lines. The stock on hand originally cost £50 and the replacement cost is currently £52 per unit.

-The R105 capacitors are an old model that has been replaced by the R106 model. Sufficient stock of the R105 is available to meet this contract. The book value is £1 per capacitor and, if not used on this contract, they will have to be disposed of at a cost of £2,000.

-While the company is not currently operating at full capacity, it is expected that given the short timeline to fulfil this contract overtime may have to be worked. The production manager has estimated that the contract will need 8,000 direct labour hours, of which 3,000 will be overtime hours. The direct workers are paid for a standard 39 hour week at £15 per hour. Overtime is paid at time and a half.

-Manufacturing overhead is recovered as follows: Variable manufacturing overhead £2 per labour hour

Fixed manufacturing overhead £5 per labour hour

-The production and design department has estimated that it has spent 20 hours on this contract. This department charges out its services at a fixed rate of £50 per hour.

-The company usually charges a profit margin of 25% on all products.

Requirements -

a) Using relevant costing principles, calculate the total minimum contract price and price per unit that the company should charge.

b) What non-financial factors might the company need to consider before pricing this contract?