The Ray Lee Cycles plc is a long-established bicycle manufacturing company based in Nottingham. Since the year 2008, it has relocated its factory operations to Sri Lanka, Vietnam and Thailand. Design, financial management, marketing and distribution activities continue to be based in United Kingdom.

The company’s Sri Lankan division solely produces the BMK, a bicycle manufactured exclusively for Al Fords plc, a UK bicycle retailer. For the year beginning 1 April 2020 it budgeted to operate at 100% of its practical capacity of 100,000 bicycles per annum. At this level of budgeted activity, the standard cost card for a BMK bicycle is as follows:

Sri Lankan Rupees (000)

Variable production costs:

Materials 5

labour 1

variable production overheads 1

Total variable production costs 7

Fixed production overheads 7

Factory costs 14

Variable transport overhead 1

Full cost 15

Profit 5

Standard price per BMK 20

Note: variable production overheads are based on 1 machine hour at 1,000 rupees and Fixed production overheads are 100% on variable production costs

Fixed production overheads include local factory administration, and do not vary within the practical range of activity. The standard profit mark-up of 331/3% is applied to “full cost” as this is felt to give a fair return on assets employed and appears to be acceptable to the customer at the current exchange rate of 200 Sri Lankan Rupees per £1 sterling.

It has become obvious to the management of Ray Lee Cycles plc that there is going to be a shortfall of sales of BMK bikes during 2020/21, which are now expected to be 30% below forecast. In response to this shortfall, the marketing department has identified an opportunity for the Sri Lankan division to undertake a special order for another UK retailer, Bostin Bikes Ltd., who want to purchase 25,000 bikes which would have cheaper frames and gearing than the BMK model, and would be sold under the “Bostin” brand name. Standard material costs for the modified bike are 4,000 rupees, labour and variable transport overhead are expected to be the same as for the BMK model, but machining is expected to reduce to three quarters of an hour per bike.

You are required to:

(a) Make computations showing the price that will be quoted in Sri Lankan Rupees for the full special order from Bostin Bikes Ltd., based on:

(i) full cost-plus pricing, on the current basis;

(ii) a price which would enable the original budgeted profit to be attained.