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This question is taken from Becker’s revision kit pg 17 q6.2
Budgeted sales volume for the next three months is 50,000 units. Production capacity is 18000 units per month. The following per unit info is available:
Selling price: €160
Variable Cost: €80
Fixed Overheads: €33
Total Costs: €113
Profit €47A potential overseas customer has requested a price for an initial order of 3000 units over the next three months.
Assuming that the company wishes to ensure that short-term profit is not reduced if the enquiry becomes an order, what is the minimum price per unit that should be quoted?
Ans (a) € 80; (b) €113; (c) €146; (d) €160
Ans:
The budgeted sales for the 3 month period are 50000 units, which leaves only 4000 units excess capacity (18000 x 3) less 50000. My guess is to charge the full price of €160 but I’m not convinced.
Can you help please?
I do not have Becker books.
However, there is spare capacity of 4,000 units and the overseas customer wants 3,000.
Fixed costs in total will remain unchanged, and therefore to ensure no reduction in profits they need to cover the variable costs. Therefore they should charge a minimum of €80 to cover the variable costs.
(In the long term this could cause a problem because the customer might want more at that price in the long-term. However the question is only asking about short-term profit.)
Do Becker not give answers to their questions?
Thanks for the answer. I am working on an online revision kit that I found which unfortunately does not have the answers.
With respect to this question, the spare capacity is 4000 over the 3 months. My understanding is that the customer wants 3000 per month, which means that there will not be enough. If this is the case, wouldn’t it make sense to charge the customer the full selling price?
Hello,
I am able to give you the answer trom Becker. According to it, the correct one is B: 113Explanation: the min.price is the relevant cost;
Capacity is 54K per quater (18×3);
Domestic sales are 50K per quater;
so there is spare capacity of 4K;
potentatial order can be satisfied without any loss, so there is no opportunity cost.The relevant cost is the incremental cost, which is the variable cost per unit.
Moniq
Thanks a lot.
However the 113 is the total cost not the variable cost. The 113 includes the Fixed cost.
Mr Moffat an you help please?thanks!
Moniq: Thank you.
cfelicepace: You are using a pirate copy of the revision kit. It is both illegal and unethical (and is wasting your own time because of not having the answers).
You should buy a Revision Kit directly from the publishers – you can buy either hard or soft copies from them.
Sir, as mentioned above that the relevant cost in this question is the incremental cost, i.e, the variable cost/unit i.e, $80. Why is the books answer $113? Is it a printing mistake, because $80 is the variable cost and $33 is the Fixed O/H?
Thanks
It’s a sample copy from the Becker site itself – not a pirate copy. It is not a full copy but provides a taster of what it has to offer. hence the reason why it doesn’t have answers.
If the original question had been copied on here correctly, then the answer should be $80.
Hello all,
thanks for your responses. This is indeed true – the correct answer is 80 $ . Variable cost of course, as stated above.I`ve raised it on Becker forum. And got confirmation that the answer should be A: 80$ (and not B – printing issue).
Thanks again for paying attention to it:)
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