Question

Sata Ltd is a shoe manufacturer who has an operating profit of $25 per pair on selling price of $143 per pair. Sata Ltd is currently producing 6,000 pairs per annum which is 60% of the practical capacity. The cost per pair is as follows:

ACCT1064 Final Main Assessment (Melbourne), Semester 1, 2020 Page 2 of 4

Particulars

Direct materials
Direct wages
Works overheads (50% fixed) Administrative overheads

Amount ($)

35.00 12.50 62.50

6.00

For the next year the manufacturer estimates the demand to remain at 6,000 pairs per annum. The manufacturer also anticipates that the fixed overheads to go up by 10% while the rate of direct labour and direct materials will increase by 8% and 6% respectively. The company incurs other fixed costs of $12,000 per annum which do not form part of the product costs. Due to the intense competition, Sata Ltd will not be able to increase the selling price of the shoes next year and will continue to sell the shoes at $143 per pair.

Sata Ltd is approached by a large retailer to supply shoes on a onetime only special-order basis equating to 20% of practical capacity. Sata Ltd would like to earn an overall profit of $167,300 next year.

Required:

1. (a) Prepare marginal costing income statements showing operating profit for Sata Ltd. (from regular demand of 6,000 units per annum) for the current year and for the next year. (9.5 Marks)

2. (b) Determine the minimum price per pair of shoes at which you would recommend Sata Ltd to accept the one time only special order? (5.5 Marks)

Answer 1

(a) Marginal costing income statements showing the operating profit for Sata Ltd. (from regular demand of 6,000 units per annum) for the current year and for the next year:

(b) Determine the minimum price per pair of shoes at which you would recommend Sata Ltd to accept the one time only special order: