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Question 3b

Brick by Brick (BBB) is a business which 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.

BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis, resulting in a budgeted total cost of $11,000 for each GC and $20,500 for each EX. Consequently, the products are priced at $16,500 and $30,750 respectively.

The company is considering moving to an activity based cost approach. 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.

(b) Assume that the cost of a GC falls by approximately 7% and the cost of an EX rises by approximately 2% as a result of a change to ABC.

Required:
Suggest possible pricing strategies for the two products which BBB sells and suggest one reason other than high prices for the current poor sales of the GC. (5 marks)