Question

A company is currently manufactuing at only 60% of full practical capacity , in each of its two production Deppartment , due to a redution in the market share . the company is seeking to Launch a new product which it is hoped will recover some lost sales .

the estimaated direct cost of the new product , product X . are to be established from the following information :

Direct Material

every 100 unit of the product will require 30 Kg net of Material A . losses of the 10% of the material input are to be expected . Material A cost 5.40$ per Kg before discount , A quantity discount of 5% is given on all purchase if the monthly purchase quantity exceed 25000 kg . other materials are expected to cost 1.34$ unit of product X .

Direct labor ( per hundered unit )

Department one : 40 hours at 4.00$ per hour

Department two : 15 hours at 4.50$ per hour

Separated overhead absorption rate are established for each production Department .

Department 1 overhead are absorbed at 130% of Direct wages , which is based upon the expected overhead costs and usage of capacity if the product X is launched .

the rate in Department 2 is to be established as a rate per Direct labor hour also based on expected usage of capacity . the following annual figures for Departmnet 2 are based on full practical Capacity :

overhead : 5424000 $

Direct labor hours : 2200000 hour .

variable overhead in Department 1 are assessd at 40% of Direct wages and in Department 2 are 1980000 $ ( at full practical capacity ) .

non- production overhead are estimated as follows ( per units of product X) :

variable , 0.70$

Fixed , 1.95 $ .

the selling prices for the product X is expected to be 9.95 per unit , with annual sales of 2400000 units .

Required :

1- Determine the estimated cost per unit of product X

2- comment on the viability of product X

3- market reserach indicate that an alternative selling prices for the product x could be 9.45$per unit . at which prices annual sales would be expected to be 2900000 unit . Determie and comments briefly upon ,the the optimum selling price .

Answer 1

		Cost for 100 Units	Cost Per Unit
	Direct Material	30Kg
Less	Loss	3 Kg
		27Kg @ 5.4
	Other Material	1.34
	Direct Labour
	1	40Hr @ 4.
	2	15Hr @4.5
	Particulars	Costs Per Unit
	Direct Material	1.62
	=(30*5.4)/100
	Other Material	1.34
	Direct Labour Costs
	Department-1	1.6
	=(40*4)/100
	Department-2	0.675
	=(15*4.5)/100
	Variable Costs	5.235
	Overhead Expenses
	Department-1	2.08
	=130%*1.6
	Department-2	2.47
	=5424000/2200000
					3666667
	Variable Overhead
	Department-1	0.64
	=40%*1.6
	Department-2	0.9
	=1980000/2200000
	Non-Production Overhead
	Variable	0.7
	Fixed	1.95
		19.21
2	Since, the sale price of the product X is 9.95 per unit and since the cost is higher than the sale price, product X is not viable.
3	Optimum selling price is the variable cost of producing the extra unit i.e. 12.71
	Direct Material	1.62
	=(30*5.4)/100
	Other Material	1.34
	Direct Labour Costs
	Department-1	1.6
	=(40*4)/100
	Department-2	0.675
	=(15*4.5)/100
	Variable Costs	5.235
	Variable Overhead
	Department-1	0.64
	=40%*1.6
	Department-2	0.9
	=1980000/2200000
	Non-Production Overhead
	Variable	0.7
		12.71
Note-
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