Response to the following problem:
Rob Otics Ltd, a small business that specialises in building electronic-control equipment, has just received an order from a customer for eight identical robotic units. These will be completed using Rob Otic's own labour force and factory capacity. The product specification prepared by the estimating department shows the following:
? Material and labour requirements for each robotic unit: Component X 2 per unit Component Y 1 per unit Component Z 4 per unit
? Other miscellaneous items: Assembly labour 25 hours per unit (but see below) Inspection labour 6 hours per unit As part of the costing exercise, the business has collected the following information:
? Component X. This item is normally held by the business as it is in constant demand. The 10 units currently held were invoiced to Rob Otics at £150 a unit, but the sole supplier has announced a price rise of 20 per cent effective immediately. Rob Otics has not yet paid for the items currently held.
? Component Y. 25 units are currently held. This component is not normally used by Rob Otics but the units currently held are because of a cancelled order following the bankruptcy of a customer. The units originally cost the business £4,000 in total, although Rob Otics has recouped £1,500 from the liquidator. As Rob Otics can see no use for it, the finance director proposes to scrap the 25 units (zero proceeds).
? Component Z. This is in regular use by Rob Otics. There is none in inventories but an order is about to be sent to a supplier for 75 units, irrespective of this new proposal. The supplier charges £25 a unit on small orders but will reduce the price to £20 a unit for all units on any order over 100 units.
? Other miscellaneous items. These are expected to cost £250 in total. Assembly labour is currently in short supply in the area and is paid at £10 an hour. If the order is accepted, all necessary labour will have to be transferred from existing work, and other orders will be lost. It is estimated that for each hour transferred to this contract £38 will be lost (calculated as lost sales revenue £60, less materials £12 and labour £10). The production director suggests that, owing to a learning process, the time taken to make each unit will reduce, from 25 hours to make the first one, by one hour a unit made. Inspection labour can be provided by paying existing personnel overtime which is at a premium of 50 per cent over the standard rate of £12 an hour. When the business is working out its contract prices, it normally adds an amount equal to £20 for each assembly hour to cover its general costs (such as rent and electricity). To the resulting total, 40 per cent is normally added as a profit mark-up.
Required:
(a) Prepare an estimate of the minimum price that you would recommend Rob Otics Ltd to charge for the proposed contract, and provide explanations for any items included.
(b) Identify any other factors that you would consider before fixing the final price.