39.
Pricging decision and Product Decision:
(a) Pricing Decision: (i) Full cost approach (ii) Incremental cost approach
Problem 40. The market study for a fancy trays has suggested the following demand schedule at
various prices for a new tray:
Price Quantity(units) per quarter
15 35,000
16 25,000
17 15,000
18 13,000
20 10,000
22 2,000
25 1,000
Additional information:
Plant capacity 35,000 units per quarter, Fixed cost Tk.9000 per quarter,
Variable cost Tk.12 per unit.
You are required to determine the optimum price that will maximize profit.
41. Problem. A firm is selling X product, whose variable cost per unit is Tk.10 and fixed cost
is Tk.6,000. It has sold 1,000 articles during one month at Tk20 per unit. Market research
shows that there is a great demand for the product if the price can be reduced. If the price can
be reduced to Tk.12.50 per unit, it is expected that 5,000 articles can be sold in the expanded
market. The firm has to take a decision whether to produce and sell 1,000 units at the rate of
Tk.20 or to produce and sell for the growing demand of 5,000 units at the rate of Tk.12.50.
Give your advise to the manager in taking the decision.
42. Problem. A newly incorporated company plans to introduce a new product. Sales volumes,
along with the selling price and variable costs per unit have been estimated as follows:
Sales (units) Selling price Variable cost
2,500 9.50 6.000
5,000 9.00 5.750
7,000 8.50 5.625
10,000 8.00 5.000
12,500 7.00 4.875
15,000 6.00 4.875
17,500 5.00 4.875
20,000 4.00 4.875
Fixed costs directly traceable to the new product are expected to be Tk.20,000 for any volume
up to and including 10,000 units. Above that volume, fixed costs would increase to Tk.30,000.
You are required to ascertain the price at which the company should introduce this new product
if it wishes to maximize its short run profit on the product.
Problem 43. A company has a capacity of producing 50,000 units of a certain product per
month. The sales department reports that the following sales prices are available:
Sales(% of Capacity) Selling price per unit
50 2.00
60 1.90
70 1.85
80 1.80
90 1.70
100 1.60
Variable cost per unit is Tk.1.00 and the fixed cost for 100% capacity is Tk.20,000.00 per
month.
(a) You are required to prepare a statement showing the level of production and sales that
will maximize profit.
(b) If there is an offer at Tk.1.50 per unit for the balance capacity over the maximum profit
volume for export and price quoted will not affect the internal sale, will you advise to
accept the offer? Why?
Problem 44. Due to industrial depression a company is running at present at 50% of its
capacity. The following details are available:
Cost of production per unit:
Direct materials Tk.2
Direct labour Tk.1
Variable overhead Tk.3
Fixed overhead Tk.2
Total Tk.8
Production per month 20,000 units
Total cost of production Tk.1,60,000
Sales Tk.1,40,000
Loss Tk.20,000
An exporter offers to buy 5,000 units per month at the rate of Tk.6.55 per unit and the company
hesitates to accept the order for fear of increasing its already large operating losses. Advise
whether the company should accept or decline this offer.
Problem 45. The budget at 80% capacity of A Ltd. Company is as below:
Production in units 30,000
Sales Tk.6,00,000
Material cost 15,000
Labour 1,05,000
Overhead:
Variable 60,000
Semi variable 35,000
Fixed 1,00,000
An offer for additional 3,750 units is available if it is supplied at Tk.7 each. If the semi-variable
overheads increase only by Tk.1,250 for the additional production, will it be advisable to accept
this offer?
Problem 46. A Timber Merchant annually manufactures 20,000 chairs at a cost of Tk.80 per
chair and there is a home market for the entire volume of production at the sale price of Tk.85
per chair. In the year 2002 there is a fall in the demand and so 10,000 chairs can be sold only at
Tk.74.40 per chair.
The analysis of cost for 10,000 chairs is:
Materials Tk.3,00,000
Wages 2,20,000
Fixed overhead 1,60,000
Variable overhead 1,20,000
The foreign market is explored and it is found that 20,000 chairs can be sold at Tk.71.10 per
chair. The fixed overhead will increase by 10% on additional production of 10,000 chairs.
Is it worthwhile to try to capture foreign market?
Problem 47. A Company having an installed capacity of 1,00,000 units of product is currently
operating at 70% utilization. At current levels of input prices, the FOB unit cost (after taking
credit for applicable export incentives) work out as follows:
Capacity utilization(%) FOB unit cost
70 97
80 92
90 87
100 82
The company has received three foreign offers from different sources as under:
Source A 5,000 units at Tk.55 per unit FOB
Source B 10,000 units at Tk.52 per unit FOB
Source C 10,000 units at Tk 51 per unit FOB
Advise the company as to whether any or all the export orders should be accepted or not.
Product Decision
(a) Introduction of a new product or Diversification of products:
Problem 48. Pepsodent company is now producing tooth pest and thinking about the
introduction of tooth brush for its customers. The following data are available in respect of tooth
pest:
Sales Tk.5,000
Direct materials Tk.2000
Direct labour Tk.1000
Variable overhead Tk.500
Fixed overhead Tk.1,000
It is estimated that the sales of tooth brush will be Tk.1,000. The increased cost of tooth brush
will be as follows:
Raw materials Tk.480; labour Tk.220; overhead Tk.140 and advertisement tk.50(fixed). Advise
whether the proposed tooth brush will be introduced or not
Problem 49. Fauji flour mill is now producing fine quality flour for some reputed bread
manufacturers of the country. The management of the mill is thinking about the introduction of a
new product under the brand name “Fauji Bread” from its own material. The normal capacity of
the company is 50,000 units (50,000 half kg bags) of products produced and sold. The relevant
data per unit are as follows:
Selling price Tk.10.00
Direct material cost Tk.3.00
Direct labour Tk.1.50
Variable manufacturing overhead Tk.1.00
Fixed manufacturing overheads Tk.0.50
Variable saelling overheads Tk.1.00
Fixed selling espenses Tk.0.25
Profit Tk.2.75
The expected sale price of “Fauji Bread” is Tk.14 per unit (produced by half Kg packet) after
further processing. The following are the estimates of additional costs of processing 50,000 units.
Direct labour Tk.1.00 per unit
Variable manufacturing costs Tk.0.50
Variable selling costs Tk.0.20 per unit
Additional expenses(total):
Fixed manufacturoing Tk.10,000
Sales expenses Tk.5,000
You are required to decide whether the “Fauji bread” should be introduced or not.
Problem 50. A company has three product lines, all are produced in one factory. Management is
deep concerned with product C, which has consistently shown a net loss. The income statement
is given below:
Particulars A B C Total
Sales 5,00,00 0 4,00,000 1,00,000 10,00,000
Variable cost 2,95,000 2,80,000 75,000 6,50,000
Contribution 2,05,000 1,20,000 25,000 3,50,000
Fixed cost* 1,65,000 90,000 45,000 3,00,000
Net income 40,000 30,000 (20,000) 50,000
Fixed expenses of product C includes product line supervisor’s salaries of Tk.20,000.
Required: (a) Whether product C will be dropped when the only alternative is to drop product C
or to continue with it. Assume further that the total assets invested will not be affected by the
decision.
(b) Drop product C, keeping the supervisor and using the vacant facilities to product
A to satisfy its expanding demand by an additional sales of Tk.1,00,000. Which alternative is
more profitable?
Problem 51. A radio manufacturing company finds that while it costs Tk.6.25 to make
component X 273 Q, the same is availale in the market at Tk.5.75 each with assurance of
continued supply. The breakdown of the cost is:
Material (per unit) Tk.2.75
Labour Tk.1.75
Other variable costs Tk..50
Other fixed cost Tk.1.25
Total Tk.6.25
(a) Should you make or buy?
(b) What would be your decision if the supplier offered the component at Tk.4.85 each?
Problem 52. A company purchased a machine 2 years ago. Depreciation was charged on straight
line basis. Now there is no salvage value of the machine. Management is thinking to buy a new
machine at Tk.80,000. The life of new machine will be 4 years. The advantage of this machine is
it will reduce the variable cost from 1,65,000 to 1,30,000. The annual sales for the last four years
is expected Tk.2,00,000.
Is it wise to replace the old machine?
Problem 53. XYZ company purchased a machine two years ago at a cost Tk.60,000; they are
depreciating it on a straight line basis over a six years life. At present the disposal value of the
machine is Tk.10,000 only.
Management learns that a new machine can be purchased at a cost of Tk.80,000 to do the same
job having an expected life of four years with no salvage value. The new machine will reduce
variable cost from the present level of Tk.1,65,000 to Tk.1,30,000 per year. Sales volume is
expected to continue at Tk.2,00,000 per year for the next four years. Should the new machine be
procured? why?