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Sir I just saw and listened your lectures on Sniff co and you have really explained it very well but there are 2 things which I still want to ask in it
1)Sir fixed overheads have been charged $O, but this I did not understand. Its mentioned that company allocates FOH at the rate of $25 per labour hour to all products for the purposes of reporting profits. As for further processing we require 500 extra labour hours for male version and 700 extra labour hours for female version, so accordingly won’t this FOH be relevant and incremental for further processing?
2) There is a requirement to calculate selling price per 100ml for the female version of the product that would ensure further processing would break-even in test month. How we will calculate this?
1. Fixed overheads are only relevant if the total fixed overheads change as a result of the decision. For profit reporting purposes they can allocate the overheads in any way they want, but there is no mention anywhere in the question of the total fixed overheads changing.
2. To make it worthwhile, the selling price would have to be increased to cover the extra costs of producing the female version of 166,000. They are currently selling for 319,840 and so they would need to increase by 166,000 to 319,840 + 166,000 = 485,840.
This would be for the 808 litres produced, which gives a cost of 485,840/808 = $601.29 per litre (or $60.13 for 100 ml).Incidentally, this question was set by the previous examiner and so although it is a good question for practice it is harder then questions that you can expect these days.
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