Special order – Knowsia

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

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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

MA – L2 – Q35 – Relevant cost and revenue

Compute relevant cost of producing a motor, considering materials, labour, machine costs, and overheads, with reasons for cost inclusion/exclusion.

Question

Apex Manufacturing Limited (AML) is engaged in the manufacture of specialised motors. The company has been asked to provide a quotation for building a motor for a large textile industrial unit in Kumasi. Following information has been obtained by AML’s technical manager in a one-hour meeting with the potential customer. The manager is paid an annual salary equivalent to GH¢2,500 per eight-hour day.

(i) The motor would require 120 ft. of Wire-C which is regularly used by AML in production. AML has 300 ft. of Wire-C in inventory at the cost of GH¢65 per ft. The resale value of Wire-C is GH¢63 and its current replacement cost is GH¢68 per ft.

(ii) 50 kg of another material viz. Wire-D and 30 other small components would also be required by AML for the motor. Wire-D would be purchased from a supplier at GH¢10 per kg. The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity of Wire-D will be of no use to AML after the completion of the contract. The other small components will be purchased from the market at GH¢80 per component.

(iii) The manufacturing process would require 250 hours of skilled labour and 30 machine hours.
The skilled workers are paid a guaranteed wage of GH¢20 per hour and the current spare capacity available with AML for such class of workers is 100 direct labour hours. However, additional labour hours may be obtained by either:

Paying overtime at GH¢23 per hour; or
Hiring temporary workers at GH¢21 per hour. These workers would require 5 hours of supervision by AML’s existing supervisor who would be paid overtime of GH¢20 per hour.
The machine on which the motor would be manufactured was leased by AML last year at a monthly rent of GH¢5,000 and it has a spare capacity of 110 hours per month. The variable running cost of the machine is GH¢15 per hour.

(iv) Fixed overheads are absorbed at the rate of GH¢25 per direct labour hour.

Required:
Compute the relevant cost of producing the textile motor. Give brief reasons for the inclusion or exclusion of any cost from your computation.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost analysis, decision making, fixed costs, Incremental costs, Labour costs, Material costs, Opportunity costs, Relevant costs, Special order, variable costs
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

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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.

MA – L2 – Q35 – Relevant cost and revenue

Compute relevant cost of producing a motor, considering materials, labour, machine costs, and overheads, with reasons for cost inclusion/exclusion.

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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 – Q35 – Relevant cost and revenue

Compute relevant cost of producing a motor, considering materials, labour, machine costs, and overheads, with reasons for cost inclusion/exclusion.

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