Profit Margin – Knowsia

MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

Question

Nexco Industries Limited makes Product Z in department C. For the year commencing 1 January Year 7, the following budget has been formulated for department C:

	GH¢000
Direct costs
Materials	60
Labour	40
	100
Production overheads	100
Full production cost	200
Administrative and marketing overheads	50
Full cost of sale	250
Profit	50
Revenue (see note)	300

Note: This revenue is from budgeted sales of 20,000 units.
Production overheads are absorbed on the basis of 100% of direct costs. However, half of these costs are fixed, and the other half are variable. It is assumed that they vary with the cost of materials.
The administrative and marketing overheads are based on 25% of factory costs and do not vary within wide ranges of activity. A profit margin of 20% is applied to the full cost of sale. This also results in a price that appears to be fair to customers.
Halfway through the year to 31 December Year 7, it became clear that actual sales of Product Z would be 25% below budget. At about the same time that this shortfall in sales became evident, a customer asked about buying 5,000 units of a simplified version of Product Z. If Nexco Industries Limited were to produce this simplified model for the customer, the direct material and labour costs would be lower. It is estimated that materials costing GH¢12,000 and direct labour of GH¢8,000 would be required to produce the 5,000 units. As the production could take place within the firm’s existing capacity, fixed costs would not be affected.

Required:
(a) Calculate the prices that Nexco Industries Limited should quote to the customer for each unit of the simplified product, assuming that the following pricing policies are applied:
(i) Full cost plus pricing, on the current basis.
(ii) A price that would enable the company to achieve its original budgeted profit.

(b) Give your advice on the price that should be quoted to the customer.

Answer

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Tags: Budgeted profit, Cost-plus pricing, Overhead absorption, Pricing, Profit Margin, Selling price, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

Question

Nexco Limited has developed a new product, Product X, that it wishes to introduce to the market. The cost per unit is expected to be as follows, assuming annual sales of 40,000 units.

Cost per unit

Cost Item	GH¢
Direct materials:
Material M1 (2 litres at GH¢15)	30
Material M2 (0.5 litres at GH¢8)	4
Direct labour (3 hours at GH¢10)	30
Fixed overheads (3 hours at GH¢12)	36
Full cost	100

It has been company policy to price products to achieve a profit of 16.67% (one-sixth) on the sales price.

Required:
(a) Calculate the selling price that would be charged if Nexco Limited applies its normal pricing policy.

(b) If Nexco Limited decided to price products at marginal cost plus, what mark-up on the marginal cost would be required to obtain the same selling price as in (a)?

Answer

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Tags: Cost-plus pricing, decision making, Pricing, Profit Margin, Selling price
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q37 – Decision Making Techniques

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

Question

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Fixed Overheads, Incremental costs, Labour costs, Material costs, Profit Margin, Relevant costs, Special order
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

Tag (SQ): Profit Margin

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MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

MA – L2 – Q37 – Decision Making Techniques

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

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MA – L2 – Q50 – Pricing Strategies

Calculate prices for simplified Product Z using full cost-plus and budgeted profit pricing policies for Nexco Industries.

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MA – L2 – Q49 – Pricing Strategies

Calculate selling price for Product X using Nexco Limited’s normal pricing policy with a 16.67% profit margin.

You're reporting an error for "MA – L2 – Q49 – Pricing Strategies"

MA – L2 – Q37 – Decision Making Techniques

Calculate the unit price Gems Limited should bid for a special order of 150,000 units of Product Beta for Opal Limited.

You're reporting an error for "MA – L2 – Q37 – Decision Making Techniques"

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