Question

Sata Ltd is a shoe manufacturer who has an operating profit of $25 per pair on selling price of $143 per pair. Sata Ltd is currently producing 6,000 pairs per annum which is 60% of the practical capacity. The cost per pair is as follows: Particulars Direct materials Direct wages Works overheads (50% fixed) Administrative overheads Amount ($) 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: (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) (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)
Income Statement (Marginal Costing)
	This Year	This Year	Next Year	Next Year
Units produced & sold		6000		6000
	PerUnit	Amt. $	PerUnit	Amt. $
Sales	143	858000	143	858000
Less:Variable costs:
DM	35	210000	37.1	222600
DW	12.5	75000	13.5	81000
W OH	31.25	187500	31.25	187500
total Variable costs	78.75	472500	81.85	491100
Contribution	64.25	385500	61.15	366900
Less:Fixed Costs:
W OH (Next Yr 10% increase)		187500		206250
Ad OH (Next Yr 10% increase)		36000		39600
Other (Next Yr 10% increase)		12000		13200
Total Fixed Costs		235500		259050
Net Operating Profit		150000		107850
b)	Next Year
Desired profits	167300
less: Normal profits	107850
Profits desired of special Order	59450
Special Order Units (6000*20%)	1200
	Amt. $
Profits desired per Special Order Unit	49.54
Unit variable costs	81.85
Minimum Special Order Price per unit	131.39