A Hawkins Ltd expects its cost per unit, assuming a production level of 100,000 per annum, to be:

Selling price is \(£ 7.5\) per unit.
The following propositions are put to the managing director. Each proposition is to be considered on its own without reference to the other propositions.

(a) If the selling price is reduced to \(£ 7.4\) per unit, sales could be raised to 120,000 units per annum instead of the current 100,000 units. Apart from direct materials, direct labour and factory variable expenses there would be no change in costs.

(b) If the selling price is put up to \(£ 7.7\) per unit, sales would be 80,000 per annum instead of 100,000 . Apart from variable costs there would also be a saving of \(£ 2,000\) per annum in finance costs.

(c) To satisfy a special order, which would not be repeated, 5,000 extra units could be sold at \(£ 6.3\) each. This would have no effect on fixed expenses.

(d) To satisfy a special order, which would not be repeated, 3,000 extra units could be sold for \(£ 5.9\) each. This would have no effect on fixed expenses.
Draft a memo stating what you would advise the managing director to do giving your reasons and workings.

Transcribed Image Text:

Direct materials Direct labour Factory indirect expenses: Variable Fixed Selling and distribution expenses Administration expenses Finance 2.8 2.4 0.8 0.4 0.2 0.3 0.1 7.0