merit

There is a question about Pricing which is very confusing me, the question as follow:
Given that 20,000 units are budgeted, the costs below apply to Nunes for the current year.

D. Material £30
D. Labour £10
Variable overhead £10
Fixed overhead £10
Total £60

It has been identified that major cost increases will apply to the following year.
D. Material Increase: 20%
D. Labour 5%
Variable overhead 5%
Fixed overhead 25%
It is possible that material could be substitued with a cheaper grade allowing the cost to remain at £31.25per unit. However a rejection rate of 5% will arise.This would require an additional inspection costing £30,000 per annum.

The selling price has in the past been set using a mark-up on full cost of 50%, and a price of £90 was used in the current year. However, the sales manager has estimated price/demand relationships as follows:

Price £80 £84 £88 £90 £92 £96 £100
Demand 25 23 21 20 19 17 15
(000's)

Required:
a) Decide whether the product should use the existing or cheaper material and calculate the profit maximising price, volume and profit in each case.

b) At what sales volume will the profits using either material equate?

I don't know which one is existing material cost as they have one in current year and another apply to following year, quite confusing about that, also do I need to use P=a - bQ, to get the volume of cheaper materail and price?
Anyone know how to do this question? Please, please tell me! Thank you!

merryman

You have to use next year's cost as you're planning for next year pricing

You have to compare the material usage for various demands, both either using the existing materials or using the cheaper alternatives.

You have to present your answer something like this:
Calculation of next year's cost per unit and total fixed overheads

Price £80 £84 £88 £90 £92 £96 £100
Demand 25 23 21 20 19 17 15
(000's)
Variable Cost of manufacturing per unit
-original material
-substitution (remember to include the inspection)

find the contribution per unit at each price for
-original material
-substitution (remember to include the inspection)

find the total contribution at each price according to the quantity demanded for
-original material
-substitution (remember to include the inspection)

pick the highest for each material for highest contribution

afterwhich, deduct the fixed costs (fixed overheads and the additional fixed inspeaction costs)

calculate the profit for each material

decide between the materials which is getting more profit

for b) it is easier to use the graphic method or find out the equation


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hope this helps as I cleared my f5 last Decemeber and hasnt touch anything close to it since then.

lyndseyd

omg stop ur scaring me! i havent a notion!