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Case Study TrinJam (TJ) is a company building eco-friendly houses using energy saving technology. TJ has been asked to provide a quotation to build a...
Case Study TrinJam (TJ) is a company building eco-friendly houses using energy saving technology. TJ has been asked to provide a quotation to build a pilot house in a housing development. Management of TJ believes that securing the contract will help to launch their houses and have agreed to quote a price for the house that will exactly cover its relevant cost. The following information has been obtained in relation to the contract:
1. The Chief Executive recently met with the potential client to discuss the house. The meeting was held at a restaurant and TJ provided food and drinks at a cost of $375.
2. 1,200 kg of Material Z will be required for the house. TJ currently has 550 kg of Material Z in its inventory purchased at a price of $58 per kg. Material Z is regularly used by TJ in its houses and has a current replacement cost of $65 per kg. The resale value of the Material Z in inventory is $35 per kg.
3. 400 hours of construction worker time are required to build the house. TJ's construction workers are paid an hourly rate of $22 under a guaranteed wage agreement and currently have spare capacity to build the house.
4. The house will require 90 hours of engineer time. TJ engineers are paid a monthly salary of $4,750 each and do not have any spare capacity. In order to meet the engineering requirement for the house, TJ can choose one of two options: (i) Pay the engineers an overtime rate of $52 per hour to perform the additional work. (ii) Reduce the number of engineers' hours available for their existing job, the building of Product Y. This would result in lost sales of Product Y. Summary details of the existing job the engineers are working on: Information for one unit of Product Y Sales revenue $4,860 Variable costs $3,365 It takes 30 Hrs to produce a unit of product Y
5. A specialist machine would be required for 7 weeks for the house build. TJ has 4 weeks remaining on the 15 week specialist machine rental contract that cost $15,000. The machine is currently not in use. The machine can be rented for an additional 15 weeks at a cost of $15,250. The specialist machine can only be rented in blocks of 15 weeks. Alternatively, a machine can be purchased for $160,000 and sold after the work on the house has been completed for $140,000.
6. The windows required for the house have recently been developed by TJ and use the latest eco friendly insulating material. TJ produced the windows at a cost of $34,950 and they are currently the only ones of their type. TJ were planning to exhibit the windows at a house building conference. The windows would only be used for display purposes at the conference and would not be for sale to prospective clients. TJ has had assurances from three separate clients that they would place an order for 25 windows each if they saw the technology demonstrated at the conference. The contribution from each window is $10,450. If the windows are used for the contract, TJ would not be able to attend the conference. The conference organisers will charge a penalty fee of $1,500 for non-attendance by TJ. The CEO of TJ can meet the clients directly and still secure the orders for the windows. The meetings would require two days of the CEO's time. The CEO is paid an annual salary of $414,000 and contracted to work 260 days per year.
7. The house build requires 400kg of other materials. TJ currently has none of these materials in its inventory. The total current purchase price for these other materials is $6,000.
8. TJ's fixed overhead absorption rate is $37 per construction worker hour.
9. TJ's normal policy is to add a 12% mark-up to the cost of each house. Required:
(a) Produce a schedule that shows the minimum price that could be quoted for the contract to build the house. Your schedule should show the relevant cost of each of the nine items identified above. You should also explain each relevant cost value you have included in your schedule and why any values you have excluded are not relevant. (16 marks)
(b) Explain TWO reasons why relevant costing may not be a suitable approach to pricing houses in the longer term for TJ. (2 marks) (c) Recommend, with justifications, a pricing strategy for TJ to use to price the innovative, eco-friendly houses when they are launched. (2 marks)
Suggested Approach Part (a) Carefully read the question to understand the relevant cost impact of each item of information. For each item, 1 to 9, you were required to show the relevant cost along with an explanation of their treatment of the costs. A clear layout and full explanation of cost treatment were required.
Part (b) You need to explain two reasons why relevant costing may not be a suitable approach to pricing houses in the longer term and relate their explanation to the scenario. Part (c) Justified recommendations were required. The recommendation must be specific and relevant to the innovative environmentally friendly houses produced by TJ explained. Explanations of unrelated pricing strategies would not earn marks
