Question
In: Accounting
A company, currently operating at full capacity, manufactures and sells saucepans at £2 each. Current...
A company, currently operating at full capacity, manufactures and sells saucepans at £2 each. Current volume is 100,000 pans per annum with the following cost structure.
Operating Statement for year
£
Sales (100,000 at £2) 200,000
less Marginal Cost
Labour 80,000
Material 50,000 130,000
= Contribution 70,000
Fixed Costs 30,000
= Net profit £40,000
An opportunity has arisen to supply an additional 30,000 pans per annum at £1.18 each.
Acceptance of this order would incur extra fixed costs of £8000 per annum for the hire for additional machinery and the payment of an overtime premium of 20% for the extra direct Labour required. Should this order by accepted?
What other factors need to be considered?
Solutions
Expert Solution
| net loss will be 16400 the decision will not be accepted | ||||
| the factors will be labor cost and raw materials cost and here the fixed cost also increasing so this should consider because this is increasing due to increasing the production | ||||
| At additional 3000 pans | ||||
| Sales | 35400 | 30000 pans X 1.18 per pan | ||
| Materials required | 15000 | 50000/100000 X 30000 pans | ||
| Labor required | 28800 | (80000/100000 X 30000 pans )X 120/100 | ||
| Total variable cost | 43800 | 15000+28800 | ||
| Contribution= sales less variable cost | -8400 | 35400-43800 | ||
| Fixed cost | -8000 | |||
| net loss | -16400 | -16400 | ||
| the material cost for 50000 for 100000 pans and it is 15000 for 30000 pans | ||||
| labor 80000 for 100000 pans and it is 24000 (80000/10000 X 30000) plus 20 % premium that is 4800 (2400 X 20/100) the total labor charges will be $28800 ( 24000+4800) | ||||
| additional fixed cost required will be 8000 | ||||
| net loss will be 16400 the decision will not be accepted | ||||
| the factors will be labor cost and raw materials cost and here the fixed cost also increasing so this should consider because this is increasing due to increasing the production | ||||
| the contribution due to decreasing in selling price from 2 to 1.18 |
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