An umbrella manufacturer makes an average profit of Rs. 50 per unit on a selling...
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Accounting
An umbrella manufacturer makes an average profit of Rs. 50 per unit on a selling price of Rs. 286 by producing and selling 60,000 units at 60% of potential capacity. The cost of sales per unit is as follows:
Direct Materials - Rs. 70
Direct Wages - Rs. 25
Factory Overheads - Rs. 125 (50% variable)
Selling Overheads - Re. 16 (75% fixed)
During the current year the company intends to produce the same number but estimates that the fixed cost would go up by 10% while the rates of direct wages and direct materials will increase by 8% and 6% respectively. However, the selling price cannot be changed.
Under this situation the company gets an offer for a further 20% increase in plant capacity.
What minimum price would you recommend for an acceptance of the offer to insure the manufacturer an overall profit of Rs.33,46,000.
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