Question

In: Accounting

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London...

The Rewehon department at Greenwich plc manufactures high quality toy cars for customers in the London area. Selected data from the budget for the 12 months ending 31st December is available:
Budget 2000

£
Sales (90,000 units) 2,700,000
Cost of goods sold (see notes 1 and 2) 1,800,000
Gross profit 900,000
Selling general & administrative overheads (see note 3) 650,000
Profit before tax 250,000


Note 1. Cost of goods sold includes fixed costs of £400,000
Note 2. If production is increased from 90,000 units to 100,000 units per annum it is estimated that fixed costs will increase by £20,000
Note 3. Sales commission on the existing orders is 7.5% of sales and is included in the total cost of £650,000. All other costs are assumed to be fixed.

Capacity
The current capacity at the factory is 100,000 units per year. In the budget for the year the company expect to sell 90,000 units.
New order
After agreeing the budget a company in South Africa contacted Greenwich to discuss two orders. This is an unusual situation, as the Rewehon department has never exported before.
The first order is for 10,000 units but if the selling price is reduced they will place a larger order. Rewehon have to accept only 1 order. Details of the orders are as follows:

Order 1*
Quantity 10,000 units
Selling price £22 per unit


*The sales commission for this order will increase to 10%. Additional variable shipping costs will be 5% of sales value and additional insurance to export the toy cars will be £3,000. (Also refer to note 2 above)

Order 2**
Quantity 20,000 units
Selling price £21 per unit


**The sales commission for this order will be 10%. Additional variable shipping costs will be 5% of sales value and additional insurance costs will be £8,000. (Also refer to note 2 above)   Calculate the minimum price for order 1.

Multiple Choice

  • £21.

  • £14.

  • £12.

  • £8.

Solutions

Expert Solution

The Answer is £ 21, explained as under

Notes for additional cost of 10,000 units

Variable cost of Production is £ 16/ unit and it will remain same for adiitional 10,000 units

Additiona fixed cost of Prodcution for 10,000 units is £ 20,000, so for 10,000 units, the per unit cost is £ 2/unit

Selling commission is 10% of Sale price (10%*22*10,000) and per unit cost comes at £ 2/unit

Shipping cost is 5% of Sale price (5%*22*10,000) and per unit cost is £ 1/unit

Insuance cost is fixed at £ 3000 and accordingly per unit cost is worked (R/o)

Thus additional cost for 10,000 unit is £ 21/unit. The Company can accept this as minimum Selling Price

ekkarill92 answered 1 year ago
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