Kadok Co (Becker kit problem)

Production overheads are absorbed on the basis of 100 % of direct costs. However, half are fixed, while the remainder relate to the machining of the materials. The administrative and marketing overheads are based on 25 % of factory costs and do not vary within wide range of activity. For each department a profit margin of 20% is applied to the “full costs”, as this is felt to give a fair return on assets employed as well as to provide a reasonable reward for entrepreneurial effort. This also results in a price that appears to be fair to consumers. Halfway through the budget period it became obvious to the management of Kadok that there was going to be a shortfall in sales that could be expected to be 25% below the forecast. At about the same time that this shortfall in sales became evident, a chain of photographic shops shoed an interest in purchasing 5000 units of a special camera that would be stripped down to bare essentials and sold under the chain’s bran name Noxid. If Kadok were to produce such a model there would obviousely be a saving on the usual material and labour unit costs. The management accountant of Kadok estimated that materials costing $12000 and labout of $8000 would be required to produce the 5000 cameras.
As the production could place within the firm’s existing capacity, fixed costs would not be affected.