Tag (SQ): Fixed Overheads

Gems Limited (GL) is a manufacturer of consumer durables based in the Upper Region. Opal Limited, one of the major customers, has invited GL to bid for a special order of 150,000 units of Product Beta.

Following information is available for the preparation of the bid:

(i) Each unit of Beta requires 0.5 kilograms (kg) of material “C”. This material is produced internally in batches of 25,000 kg each, at a variable cost of GH₵200 per kg. The setup cost per batch is GH₵80,000. Material “C” could be sold in the market at a price of GH₵225 per kg. GL has the capacity to produce 100,000 kg of material “C”, however, the current demand for material “C” in the market is 75,000 kg.

(ii) Every 100 units of Product Beta requires 150 labour hours. Workers are paid at the rate of GH₵9,000 per month. Idle labour hours are paid at 40% of normal rate and GL currently has 20,000 idle labour hours. The standard working hours per month are fixed at 200 hours.

(iii) The variable overhead application rate is GH₵25 per labour hour. Fixed overheads are estimated at GH₵22 million. It is estimated that the special order would occupy 30% of the total capacity. The production capacity of Beta can be increased up to 50% by incurring additional fixed overheads. The fixed overhead rate applicable to enhanced capacity would be 1.5 times the current rate. The utilised capacity at current level of production is 80%.

(iv) The normal loss is estimated to be 4% of the input quantity and is determined at the time of inspection which is carried out when the unit is 60% complete. Material is added to the process at the beginning while labour and overheads are evenly distributed over the process.

(v) GL has the policy to earn profit at the rate of 20% of the selling price.

Required:

Calculate the unit price that GL could bid for the special order to Opal Limited.