SJ Services Ltd has been asked to quote a price for a special contract to render a service that will take the business one week to complete. Information relating to labour for the contract is as follows:
Grade of labour Hours required Basic rate/hour Skilled 27 £12 Semi-skilled 14 £9 Unskilled 20 £7
A shortage of skilled labour means that the necessary staff to undertake the contract would have to be moved from other work that is currently yielding an excess of sales revenue over labour and other costs of £8 an hour. Semi-skilled labour is currently being paid at semi-skilled rates to undertake unskilled work. If the relevant members of staff are moved to work on the contract, unskilled labour will have to be employed for the week to replace them. The unskilled labour actually needed to work on the contract will be specifically employed for the week of the contract. All labour is charged to contracts at 50 per cent above the rate paid to the employees, so as to cover the contract’s fair share of the business’s general costs (rent, heating and so on). It is estimated that these general costs will increase by £50 as a result of undertaking the contract. Undertaking the contract will require the use of a specialised machine for the week. The business owns such a machine, which it depreciates at the rate of £120 a week. This machine is currently being hired out to another business at a weekly rental of £175 on a week-by-week contract. To derive the above estimates, the business has had to spend £300 on a specialised study. If the contract does not proceed, the results of the study can be sold for £250. An estimate of the contract’s fair share of the business’s rent is £150 a week.
Required: Deduce the minimum price at which SJ Services Ltd could undertake the contract such that it would be neither better nor worse off as a result of undertaking it.
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