Question 1

The cost analysis presented, which was prepared in relation to the previous order, should be reviewed. Material cost should not increase and may be reduced if the supplier can avail of quantity discounts. Given the larger quantities, such a discount may be possible. Labour cost should come down to €10.80, based on a rudimentary application of the learning curve. However as the labour efficiency increases by 10% each time the quantity doubles, the labour cost should come down to €9.72, by the time the additional 60,000 are produced. Production

Overheads, charged on the basis of labour cost should reduce to €12.95 accordingly. These two represent a saving of €5.33 per unit. However the most obvious issue is the design cost of €12.50. This was calculated on the basis of the total cost of €250,000 divided by 20,000 units (the first order). This has been fully recovered. The lower costs should also give rise to a lower profit per unit for the supplier.

The table below summarises these:

The new price offered is €147 less 5% i.e.; €139.65. Armed with the information above it should be possible to get the supplier to agree to a price in the region of €115- €120.

The question asks for a ‘report’ this should be addressed to, signed by, and dated.