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Cost accounting help!!

Aarthy (student) (103 Points)

20 August 2011

can someone plz provide me solution for this problem......

A company produces 4,00,000 components of machinery annually at 80% of full capacity. Regular selling price of the component is Rs.33. Budgeted annual production costs and other expenses for the year are as follows:

Raw material cost per unit :Rs. 4.25

Direct labour cost per unit : Rs.5.75

Variable factory overhead per unit :7.75

Variable selling costs : 5 % of selling price

Fixed factory and administrative overheads :Rs.39,50,000

During the year, the company received a one-time order to sell 25,000 components for which no selling expenses will be incurred. What should be the minimum price quoted by the company if it wants to earn minimum of Re. 1 per component on this order??

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4 Replies

Monica (student - CA Final) (83 Points)
Replied 20 August 2011

Hi Aarthy,

Generally to calculate the profit the formula is:

Selling Price/(Sales) - Variable Costs = Contribution

Contribution - Fixed Costs = Profit/(Loss)

In the above problem you have to calculate the sales first using reverse working.

Since the profit required is Rs.1/- per component

i.e. for 25,000 Components - 25000 x 1 = Rs.25,000/-

Fixed Costs = Rs.39,50,000

Contribution = Profit + Fixed costs = 25,000+39,50,000 = Rs.39,75,000

Raw material, Labour, Variable factory overheads are variable costs (eventhough the selling cost is variable it is not needed to be added here since they have mentioned that no selling costs will be incurred)

So variable costs =Rs. 4.25+Rs.5.75+Rs.7.75 = Rs17.75/unit

So for 25,000 units = 25000 x 17.75 = Rs. 4,43,750

Thus the sales = Contribution + Variable costs = Rs.4,43,750 + 39,75,000 = Rs.44,18,750/-

Thus the selling price to earn a profit of Rs. 1/- would be = Rs.44,18,750 / 25,000 = Rs.176.75/- per unit

1 Like

Aarthy (student) (103 Points)
Replied 20 August 2011

Oh god!! thnx yu so much.......thnx a lot for replyin early.....

Bhaskar Unnikrishnan CPA CMA (Accounts / Administration) (414 Points)
Replied 23 August 2011

Dear Monica / Aarthy,

In Marginal analysis, for calculating price for spcial orders, we dont need to take fixed cost into account.. The company is operating in 80% capacity, and stil have enough capacity to produce further 25,000 unitis (Maximum production capacity is 5,00,000), so whether the copany accept or not, no additional fixed cost will occur. So the minimum price to be charge for special offer should be equal to Variable cost. As the comapny need proft of Rs. 1 each / component, it can be V. Cost + Desired profit. so 17.75 + 1 = 18.75 (Excluding selling expense as provided in Question).

The company is selling the component for Rs 33 / component and asking for 176.75 per component is not logical i think... should be much higher than average market price....

Regards,

Bhaskar Unnikrishnan

Monica (student - CA Final) (83 Points)
Replied 26 August 2011

Originally posted by : Bhaskar Unnikrishnan
	Dear Monica / Aarthy, In Marginal analysis, for calculating price for spcial orders, we dont need to take fixed cost into account.. The company is operating in 80% capacity, and stil have enough capacity to produce further 25,000 unitis (Maximum production capacity is 5,00,000), so whether the copany accept or not, no additional fixed cost will occur. So the minimum price to be charge for special offer should be equal to Variable cost. As the comapny need proft of1 each / component, it can be V. Cost + Desired profit. so 17.75 + 1 = 18.75 (Excluding selling expense as provided in Question). The company is selling the component for33 / component and asking for 176.75 per component is not logical i think... should be much higher than average market price.... Regards, Bhaskar Unnikrishnan

Sir,

I had assumed that the company produces only the 25,000 components during the year.If that was the case my answer is right. But if the company is producing the 25,000 components in addition to its present 80% manufacturing capacity, then your answer is correct.