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375 P.23.2 The Sick Instruments Company Ltd (SICL) manufacturers calculators under the brand PURANA, using old technology. It was selling them at 500 each. The
375 P.23.2 The Sick Instruments Company Ltd (SICL) manufacturers calculators under the brand PURANA, using old technology. It was selling them at 500 each. The normal capacity of SICL is 10,000 calculators Due to the availability of calculators based on new technologies, the SICL's sales are adversaly affected. There is a pile-up of inventories of 1,000 units of PURANA calculators at a cost of 250 each and 2,000 units of raw materials at $100 per unit, production of one calculator requiring one unit of raw materials. The calculators can now fetch only 10 per cent of cost as salvage value and the raw materials which have become obsolete could be sold as a scrap for 20,000 Meanwhile, the SICL receives an offer from Sellwell Marketing Company Ltd (SWML) to buy 5,000 PURANA calculators at $200 each with a 20 per cent commission on sales. The cost associated with the production of 5,000 units is estimated as shown below: Existing total labour cost, 1,20,000 Fixed cost, 34,50,000 Additional labour cost, 140,000 Current price of materials, #125 Additional overheads, 350,000 The chief accountant computes the cost per calculator for the offer as given below: Raw material cost Existing raw material cost @ 7100 x 2,000 units 52,00,000 Additional new raw material cost @ 125 x 2,000 units 2.50.000 24,50.000 Labour cost Existing total labour cost 1.20,000 Additional labour cost 40,000 1,60,000 Overhead cost. Fixed overhead costs 4,50.000 Additional overhead charges 50,000 5,00,000 Finished goods: PURANA Calculators (@ 1250 x 1000 units) 2.50,000 Commission: (@ 0.20 x 1200 x 5,000) 2,00.000 Total costs 15,60.000 Cost per calculator R15,60,000 = 5,000) 312 With the above calculations, the chief accountant suggests the Managing Director not to accept the offer as it would result in a loss of 112 per calculator and pushing the cumulative losses further. Should the SWML's offer be accepted
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