Kofi Abebrese runs a small industrial company that specialized in the production of high standard windows for housing estates. A worker is paid GH¢0.9 per hour and can produce two windows with an hour. Each window uses a frame costing GH¢1 and incur a variable overheads of GH¢0.7. Each window sells for GH¢3. Currently, due to the economic condition, work is rather slack and three employees are occupied in carrying out extensive repairs to Kofi Abebrese's own house. Kofi owns a warehouse next to the factory, which had been used as a factory store, in the past. It is now let out on a renewable annual lease of GH¢600. A new building company, Allied Consult, which specializes in the production of prefabricated houses has asked Kofi if he would be interested in accepting a contract for GH¢30,000 which will be for a year initially, to produce molded internal building sections. Kofi estimates that, the contract will take 13,200 hours of works, or the work of five men for a year, and that variable overheads would be GH¢10,000. The work would have to replace 9,600 hours of existing work. He estimates that the material required for the contract would cost GH¢6,000. Alternatively, the work could be carried out in the warehouse; the lease is due to be renewed next month. Kofi thinks this would involve the company in an extra cost of GH¢300 for heating and the cost of power would increase by GH¢500. He would hire two new workers and pay them GH¢2,200 each per annum. If the contract was carried out in the warehouse, the other three workers would be those at present repairing Kofi's house. The three workers are paid GH¢7,700 per annum in total and it would cost GH¢2,500 to get an outside contractor to finish the house repairs. Required Advise Kofi what to do Consider the long-term implications this decision might have on Kofi's business.
Kofi Abebrese runs a small industrial company that specialized in the production of high standard windows for housing estates. A worker is paid GH¢0.9 per hour and can produce two windows with an hour. Each window uses a frame costing GH¢1 and incur a variable overheads of GH¢0.7. Each window sells for GH¢3. Currently, due to the economic condition, work is rather slack and three employees are occupied in carrying out extensive repairs to Kofi Abebrese's own house. Kofi owns a warehouse next to the factory, which had been used as a factory store, in the past. It is now let out on a renewable annual lease of GH¢600.
A new building company, Allied Consult, which specializes in the production of prefabricated houses has asked Kofi if he would be interested in accepting a contract for GH¢30,000 which will be for a year initially, to produce molded internal building sections. Kofi estimates that, the contract will take 13,200 hours of works, or the work of five men for a year, and that variable overheads would be GH¢10,000. The work would have to replace 9,600 hours of existing work. He estimates that the material required for the contract would cost GH¢6,000.
Alternatively, the work could be carried out in the warehouse; the lease is due to be renewed next month. Kofi thinks this would involve the company in an extra cost of GH¢300 for heating and the cost of power would increase by GH¢500. He would hire two new workers and pay them GH¢2,200 each per annum. If the contract was carried out in the warehouse, the other three workers would be those at present repairing Kofi's house. The three workers are paid GH¢7,700 per annum in total and it would cost GH¢2,500 to get an outside contractor to finish the house repairs.
Required
- Advise Kofi what to do
- Consider the long-term implications this decision might have on Kofi's business.
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