- 15 Marks
Question
Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:
Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.
Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.
Required:
Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)
Answer
Working Notes:
- Learning curve calculation:
The time taken for the first 50 units was 1,800 hours, and for the first 100 units was 3,000 hours. The learning rate can be calculated as follows:
Final Calculation:
Based on the above data and calculations:
| Description | N |
|---|---|
| Materials | 108,000 |
| Labour | Calculated from learning curve |
| Variable production overheads | Calculated based on labour hours |
| Fixed production overheads | 150,000 |
| Administration overheads | 30,000 |
The minimum price should cover all these costs. Therefore, Kola Plc should quote a price that reflects the total cost of production to avoid losses like the previous order.
- Tags: Fixed Costs, Learning Curve, Special Order Pricing, Variable Costs
- Level: Level 2
- Topic: Pricing Decisions
- Series: MAY 2023
- Uploader: Theophilus