Question

Q2.                                      
International Brands Ltd. Is operating at 60% capacity and producing 2,700 pieces of product A. The cost of production for the month of August 2012 was:
                       Rs.
Direct Material                54,000
Direct wages                   8,100
Variable Overheads               9,900
Fixed Overheads               18,000

The products are currently sold at an average price of Rs. 72.

A tender for supply of 900 pieces per month has been received. To submit tender the following information has been ascertained.

•   Variable Overheads attributable to various activity level is:

   %                   Per month Rs.  
   50                       8,280
   60                       9,900
   70                       11,520
   80                       13,500
   90                       15,300
   100                       16,920

Required:                                       (Mark 5)

(a)   Calculate the bidding price which will yield a 10% profit.
(b)   Prepare a statement showing the effect on the monthly profit if the company’s tender is    accepted.

Answer 1

TENDER FOR 900 UNITS MEANS THAT 20% ADDITIONAL CAPACITY
SO INTERNATIONAL BRANDS LTD WILL HAVE TO WORK AT 80% CAPACITY
ASSUMPTION: AT ADDITIONAL CAPACITY NO EXTRA FIXED OVERHEAD IS INCURRED
	60% CAPACITY	80% CAPACITY	ADDITIONAL UNITS =80%-60%
UNITS	2700	3600	900
DIRECT MATERIAL	$             54,000	$             72,000	$                                          18,000
DIRECT LABOR	$               8,100	$             10,800	$                                            2,700
VARIABLE OVERHEAD	$               9,900	$             13,500	$                                            3,600
FIXED OVERHEAD	$             18,000	$             18,000	$                                                   -
	$             90,000	$          114,300	$                                          24,300
SO COST FOR ADDITIONAL 900 UNITS IS	$             24,300
ADD 10% PROFIT MARGIN	$               2,430
BID PRICE FOR TENDER OF 900 UNITS IS	$             26,730	$               29.70
EFFECT ON MONTHLY PROFIT
	2700 UNITS	900 UNITS	TOTAL
UNIT SALE PRICE	$                     72	$               29.70
TOTAL SALE	$          194,400	$             26,730	$                                        221,130
TOTAL COST	$             90,000	$             24,300	$                                        114,300
MONTHLY PROFIT	$          104,400	$               2,430	$                                        106,830
MONTHLY PROFIT INCREASES BY $2430 PER MONTH