Financial and Legal Aspects of Procurement - Assignment Example

Question 1Solution

Break even enables the managements to analyze the relationship between cost, volume and profits generated by an entity. It gives a model for the determination of the level of output or volume of output. This model can be also used to predict what happens supposing there was a change in cost of production (Cafferky, & Wentworth, 2010).

Sky lark construction limited is a real estate developer with seven permanent employees who are paid monthly salaries as provided in the books of accounts as under;

Employee

Monthly salaries ($)

Managing Director

100,000

Managing Engineer

60,000

Marketing Manager

45,000

Project Manager

55,000

Finance Officer

40,000

Office Manager

30,000

Receptionist

20,000

350,000

In addition to the above expenses the Company leases a building for $ 20,000 per month where they have established the functional offices for administrative functions where house for storage purposes. The cost of construction suppliers, lease equipment and utilities run for $ 30,000 per month. For specialization and modernity of the town buildings Sky lark construction limited builds only one style house in the city which really gives them good reputation and publicity for great taste in estate properties developments . For this to realize by the Company they buy land for each designated project which goes for $ 550,000 lumbering, and other supplies for finishing also goes for $ 280,000 per house. The total labour cost in terms of salaries and wages for construction and bringing up a building Sky lark construction limited spend amount of $ 200,000 per house. Immediately the sale is initiated on realization of sale to the already developed house the commission $ 20,000 is paid to the sales person responsible for that particular sale per house sold, due to the uniformity of their constructions the selling price is $ 1,150,000.

Assumptions

Salaries are incurred on a monthly basis therefore are classified as fixed costs $ 350,000

Office lease and Supply cost which adds up to $ 20,000+$30,000=$50,000

Cost of land to develop, Materials cost, cost of labour, and sales commission per house are assumed variable costs which adds up to $ 550,000+$280,000+$200,000+$20,000=$1,070,000

The selling price is $ 1,150,000 and assuming x is the number of hoses developed for this period.

In order to build a cost function- Total Cost = Variable Cost + Fixed Cost;

Whereas Total revenue generated will be $ 1,150,000 therefore profit is Total Revenue –(Total Cost)Fixed cost and Variable cost that is $1,150,000X-$1,070,000X-$400,00=$80,000X-$400,000.

At break-even Total revenue is equal to Total cost by substituting we get

The break even sales will be therefore $1,070,000X5=$5,350,000

(15 marks)

Question 2

Explain in your own words, the idea behind marginal costing. Discuss what kind of opportunities this might bring to a buyer, and how it might impact your approach to purchasing a category.(15 marks) Solution

Marginal costing is technique used to set price of a given product or item based on their variable prime cost. This is done by slightly setting the price of an item above the variable cost that relates to its production. Normally this technique is used by Chief Operation Decision Maker (CODM) for internal decision making purposes termed as a short term. Due to the cost behaviors in nature some cost associated with the product tends to vary with the number of activities undertaken to avail that product. In most cases these costs can be directly traced to the product, it is very easy to predict the increase depending with the level of production (Rajasekaran, & Lalitha, 2011).

On the other hand fixed costs are experienced regardless of the measure of activity level of production for this purposes marginal costing determined the possible contribution to be generated. That is Sales minus variable cost [(SP-VC) = MC]. It is important to note that many clients are sensitive to any slight increase in price making it very difficult for these clients buy the product. It would be therefore critical to approach the pricing decision making from marginal costing point of view. Marginal cost pricing will also direct the management on the decision to take whenever there is a need for market penetration especially new market entrance. This is because it will be more obvious to know the marginal profit to forgo in order to net capture the new customer in bide of building customer blocks and loyalties by lowering the price by a given margin (Rajasekaran, & Lalitha, 2011).

Question 3Take a material or service that you are familiar with and develop a cost model from first principles. Identify at least the six largest cost-drivers, and explain the basis of your cost estimates. If you are not able to obtain accurate data to answer this question, use a guestimate and describe how you would get more accurate data in a real situation.(30 marks)

Solution

It is assumed that the in this factory four products that is W, X, Y, and Z are manufactured using the same plant and similar process and the following records are available.

Products

W

X

Y

Z

Volume in Units

1000

10000

1200

14000

Material cost per unit($)

10

10

32

34

Direct Labour per Unit (hours)

1

1

4

3

Machine time per Unit (hours)

0.5

0.5

2

3

Labour cost per Unit ($)

6

6

24

18

On analysis done by production department the following production overheads have been recorded under the following headings

$

Overhead Costs:

Factory Overhead (machine oriented activity)

74,848

Set-up costs

8,710

Material Costs:

Cost of ordering materials

3,840

Material handling Costs

15,160

Administration costs for spare parts

17,200

It is assumed that overhead cost are absorbed by the products on machine hours rate of $ 9.6 per hour giving overhead cost per unit as follows:

Products

W

X

Y

Z

$

2.4

2.4

9.6

14.4

The past data on production overhead activities for the period are as under:

Products

W

X

Y

Z

Number of set-ups

2

12

4

16

Number of Material orders

2

16

2

16

Number of times material was handled

4

20

6

24

Number of spare parts used

4

10

2

8

In developing a cost model the following cost drivers were identified that is Factory overhead, Set up cost, Cost of ordering, Frequency of material handling, and Administration cost, the table below calculates the absorption rate of each cost drivers:

Cost drivers rates:

Factory overhead

74,848,000

49,900

=$1,500/material hour

Set- up cost

8,710,000/34

=$256,176/set up

Cost of ordering

3,840,000/36

=$106,667/Material order

Material handling

15,160,000/54

$280,741 /Material hour

Admin cost

17,200,000

$716,667/Spare part

24

OVERHEADS

W

X

Y

Z

Factory Overheads

750,000

7,500,000

3,600,000

63,000,000

Set-up costs

512,352

3,074,112

1,024,704

4,098,816

ordering Costs

213,334

1,706,672

213,334

1,706,672

Material handling Costs

1,122,964

5,614,820

1,684,446

6,737,784

Administration costs

2,866,668

7,166,670

1,433,334

5,733,336

5,465,318

25,062,274

7,955,818

81,276,608

This table under highlights the cost attributable to one unit of products W, X, Y, and Z, respectively and it is this cost per unit that becomes the standard overhead cost per unit produced together with the prime cost which can be directly traced to the material.

Unit Production cost

W

X

Y

Z

Direct material

10

10

32

34

Direct Labour

6

6

24

18

Prime cost

16

16

56

52

Overhead per unit

5,465.32

2,506.23

7,232.56

5,805.47

Production cost per unit

$ 5,481.32

$ 2,522.23

$ 7,288.56

$ 5,857.47

Question 4Competition is just not about asking 4 or 5 suppliers to quote.Explain the thinking behind this statement, and describe four different approaches to increasing the levels of competition amongst suppliers, for each given an example of how it might be used.In this module it was also stated that competition requires a range of techniques to be used. Describe the reasoning behind this claim. How would the range of techniques used differ if you are in a truly collaborative relationship with a supplier?

To ensure and ensure the best prices through strategic completive biding, quotation by supplier are no longer viewed as a strategic capability of the procuring. Strategic collaborative partnerships are ranked at the top of the corporate topic of many global Companies and Supplier Relationship Management (SRM) is looked as one of the main agenda remaining as procurement topics that still makes a great significant impacts. However, many entities still face difficulties on the process of initiating, developing and managing such partnerships. To be specific, soft skills and leadership are in the forefront in blame for reasons for failure. On the other hand, technical and functional competencies are also among contributors of failure (Montgomery, & Porter 1991). 

In the competitive sector normally the essence of strategy formulation is to cope up with competition in the market. Based on both the current and future company’s plans, there is a need for the establishment of broad customization aimed at meeting the diverse customers’ needs. This can only be achieved through organization of the functions of marketing by the customers. This shall involve channeling the marketing efforts to the various needs of the market and the diversified segment. Therefore asking 4 or 5 suppliers to quote gives the buying agency a common ground to analyze among the client and come up with the best supplier to supply the right quantity, right quality at the right price. Collaborative relationship with a supplier is the one who established a concrete business relationship may be by giving trade discount and assuring warranties for the products as this shall assure the customers of the quality of the products. Where there is no monopoly in the market industry, the key players usually fight for market share, this cause competition to manifest despite the market forces rooted with the underlying economics, and competitive forces which shapes others players by adopting various strategies to encounter the rivals’ competitors in the market. However in the context of this question, Suppliers, Customers, substitute products, and potential entrants are all competitors that may prominent and active subject to the industry. The diagram bellow is a graphical presentation of Michael Porter’s five forces of competition the industry that is bargaining power of the suppliers, threat of substitutes, industrial rivalry, bargaining power of suppliers and new entrants in the market (Montgomery, & Porter 1991). 

(25 marks)Question 5

The procurement rules and procedures sets out the strategies to approach procurement of goods and services. This enables organization procuring the good or the service to vet and approve it suppliers in accordance with the procurement principles of the entity. It also gives the entity a better place to increase its chances of obtaining value for money (Bower, D. 2003). Value for money is concerned with “3Es” Economy, Effectiveness, and Efficiency. The clause above, act as a security or collateral between the procuring entity and the supplier in that in case of any breached of the contract the tenderers, reserves the right to call the Tender Bond in whole or in part as the circumstances warrant. This brings a proper ground to make the contract which the supplier and the buying entity intend to enter into binding and it forces both parties of the contract to be accountable on the process. Moreover, because it is an invitation to treat the supplier may elect to accept the offer or reject the offer but after accepting the offer you are bound by it and any failure to supply brings forfeiture of bond which will be on favor of the buying entity to mitigate against the risk of any production breakdown which may come many loses to the entity (Bower, D. 2003).

(15 marks)