Question

Question 6 Lemon Electric produces insulators for use in high-voltage applications. The company's normal production volume is 3.000 per month. The maximum production capacity is 4,000 insulators per month. The current selling price per insulator is S630. The cost per unit of manufacturing and marketing the insulators at the normal volume is shown below: Manufacturing costs (S) Direct materials Direct labour Variable overhead Fixed uvertiead 80 100 20 100 300 Marketing costs Variable Fixed 30 70 100 S400 Total unit cost

Answer 1

Lemon Electric Products Cost per Unit Total Cost N 3 Manufacturing Costs 4. Direct Material $ 80$ 240,000 $ 100$ 300,000 5 Direct Labour $ 20 $ 60,000 6 Variable Overhead S 100 $ 300,000 7 Fixed Overhead 300$ 900,000 8 9 Marketing Costs 10 Fixed 11 Variable 12 13 Total Unit Cost 14 15 Normal Production(Units) 30 $ 90,000 70 $ 210,000 100 $ 300,000 400 $ 1,200,000 $ 3000 4000 16 Maximum Production(Units) 17 S.P per insulator $ 630

c D B 19 a) If Contractors Offer is accepted (1500 units contracted and1500 units produced in-house) 20 Total Cost for in-house production of 1500 units. 1500 units 1500 units 1500units $ $ $ 80 $ 100 $ 20 $ $ 120,000 150,000 30,000 255,000 21 Direct Material 22 Direct Labor 23 Variable Overhead 24 Fixed Overhead(Declined by 15%) 25 ($300000*85%) 26 27 Marketing Costs 28 Fixed(Increase by 15%) 29 ($90000*115%) 30 Variable(Declined by 20%) 31 32 Total Cost 33 103500 1500 units 56 84000 $ 742,500 34 $ 375,000 $ 1,117,500 Cost of Contracting 1500 units @ 250 per 35 unit 36 37 Total Cost 38 39 S.P(3000*630) 40 Total Cost 41 Net Profit $ 1,890,000 $ 1,117,500 S 772.500

E H B D 34 Cost of Contracting 1500 units @ 250 per 35 unit $ 375,000 36 37 Total Cost $ 1,117,500 38 39 S.P(3000*630) $ 1,890,000 40 Total Cost $ 1,117,500 41 Net Profit $ 772,500 42 43 If Contractor offer is not accepted and 3000 units produced in house 44 45 S.P (3000*630) 1890000 46 Total Cost (3000*400) 1200000 47 Net Profit 690000 48 49 If 1500 units are contracted Lemon Electronic Product will have higher profit by $82500 50 i.e.($772500-$690000) 51 Hence it should contract 1500 units and produce 1500 units 52

B o $ 630 $ 2,520,000 А 53 b)i) 54 Net Profit earned if capacity is fully utilized 55 56 S.P per unit 57 Less: Variable Cost 58 Direct Material 59 Direct Labour 60 Variable Manufacturing Overhead 61 Fixed Manufacturing Overhead 62 Gross Profit 63 Less: Marketing Cost 64 Variable Marketing Overhead 65 Fixed Marketing Overhead 66 Net Profit ՄՌՄՌ ՄՌ 80 S 320,000 100$ 400,000 20$ 80,000 $ 300,000 $ 1,420,000 $ 70 $ 280,000 90,000 FUS 1,050,000 67

D $ А B 68 69 600 units sold to Municipality 70 71 Fixed fee earned $ 270,000 72 Variable Manufacturing Cost Recovered $ 120,000 73 [600*(80+100+20)] 74 Remaining 3400 units sold in the market 75 S.P per unit 630 $ 2,142,000 76 Total $ 2,532,000 77 Less: Variable Cost 78 Direct Labor $ 80$ 320,000 79 Variable Overhead $ 100$ 400,000 80 Variable Manufacturing Overhead $ 20$ 80,000 81 Fixed Manufacturing Overhead $ 300,000 82 Gross Profit $ 1,432,000 83 Less: Marketing Cost 84 Variable Marketing Overhead for 3400 unit $ 70$ 238,000 85 Fixed Marketing Overhead $ 90,000 86 Net Profit $ 1,104,000 87 88 Note: Variable Marketing Cost on 600 units will not be incurred. 89 Municipality Contract should be accepted since result in profit to the extent of 90 $54000($1050000-$1104000) 91

$ 91 92 ii) If fixed Fee is reduced to $240000 and all manufacturing cost are reimbursed 93 94 600 units sold to Municipality 95 96 Fixed fee earned $ 240,000 97 Variable Manufacturing Cost Recovered $ 120,000 98 [600*(80+100+20)] Fixed Manufacturing Cost 99 Incurred($300000/4000)*600 45,000 100 Remaining 3400 units sold in the market 101 S.P per unit 630 $ 2,142,000 102 Total $ 2,547,000 103 Less: Variable Cost 104 Direct Labor 80$ 320,000 105 Variable Overhead $ 100 $ 400,000 106 Variable Manufacturing Overhead $ 20$ 80,000 107 Fixed Manufacturing Overhead $ 300,000 108 Gross Profit $ 1,447,000 109 Less: Marketing Cost 110 Variable Marketing Overhead for 3400 unit $ 70 $ 238,000 111 Fixed Marketing Overhead $ 90,000 112 Net Profit $ 1,119,000 or the profit hy $15000 $ $

Hence it is good deal for the company as it increases profit by $15000.