Problem 2

The Kathmandu Product Ltd; a company engaged in production of specialized goods called 'Kath Craft' has been utilising its capacity only by 90% of its available capacity. The data relating to produce one unit of regular product are presented below:

Direct Material Cost 4 units @ Rs. 10 Rs. 40.00

Direct Labour Cost 3 hours @ Rs. 10 Rs. 30.00

Manufacturing Overhead 3 hours @ Rs.15

(Based on Direct Labour Hour) Rs. 45.00

Total cost per unit Rs. 115.00

The company at present is selling its product at Rs. 150 per unit. The company has adopted a policy of defining its capacity in direct labour hour. The annual normal budgeted hour is 3,00,000 hours and the budgeted fixed overhead for the period is Rs. 1,500,000. All manufacturing overheads are applied to production on the basis of direct labour hour at Rs. 15 per hour. The special offer will have no other cost than regular production cost.

Required: (a) The company received an special offer to supply 10,000 units of its product most similar to one the company at present is selling in the market, but under different brand name. The price offered is 120 per unit. The special offer will be required additional Rs. 5 per unit for special packaging charges than regular production cost. Should the company accept this offer and also show how total profit of the company would change by accepting this offer?

(b) If an special offer to supply 15,000 units, what will be the effect on the Kathmandu Product Ltd.

(c) Determine the minimum (floor) price that the Kathmandu Product Ltd. should change for 10,000 units and 15,000 units of offer quantity.

(d) What other considerations are important in this case? Why?