Reference no: EM132960270

Builders Limited is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have found that they are winning fewer GC contracts than expected. Builders Limited has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis.

Builders Limited thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and hence make them more competitive. You are provided with the following data:

Overhead category           Annual overheads             Activity driver          Total number of Activities per year
€
Supervisors                         90,000                             Site visits                  500
Planners                           70,000                          Planning documents             250
Property related              240,000                             Labour hours                   40,000
Total 400,000

A typical GC costs €3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by a supervisor and needs only one planning document to be raised. The typical EX costs €8,000 in materials and takes 500 hours to complete. An EX requires six site visits and five planning documents. In all cases labour is paid €15 per hour.

Required:

Problem (a) Calculate the cost and the quoted price of a GC and of an EX using labour hours to absorb the overheads.

Problem (b) Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads.

Problem (c) Assuming that the cost of a GC falls by nearly 7% and the price of an EX rises by about 2% as a result of the change to ABC, suggest possible pricing strategies for the two products that Builders Limited sells and suggest two reasons other than high prices for the current poor sales of the GC.