Question

Question 20

A selling price of GHS44 has been set in order to compete with a similar radio on the market that has comparable features to Edward Co’s intended product. The board has agreed that the acceptable margin (after allowing for all production costs) should be 20%.

Cost information for the new radio is as follows:

Component 1 (Circuit board) – these are bought in the cost GHS4.10 each. They are bought in batches of 4,000 and additional delivery costs are GHS2400 per batch

Component 2 (Wiring) in an ideal situation 25cm of wiring is needed for each completed radio. However, there is some waste involved in the process as wire is occasionally cut to the wrong length or is damaged in the assembly process. Edward Co estimates that 2% of the purchased wire is lost in the assembly process. Wire costs GHS0.50 per metre to buy.

Other material – other materials cost GHS8.10 per radio.

Assembly labour – these are skilled people who are difficult to recruit and retain. Edward Co has more staff of this type than needed but its prepared to carry this extra cost in return for the security it gives the business. It takes 30 minutes to assemble a radio and the assembly workers are paid GHS12.60 per hour. It is estimated that 10% of hours paid to the assembly workers is the idle time.

Production Overheads – recent historic cost analysis has revealed the following production overhead data:

	Total production overhead	Total assembly labour hours
	GHS
Month 1	620,000	19,000
Month 2	700,000	23,000

Fixed production overheads are absorbed on an assembly hour basis based on normal annual activity levels. In a typical year 240,000 assembly hours will be worked by Edward Co.

Required:

Calculate the expected cost per unit for the radio and identify any cost gap that might exist.

Answer 1

Answer: