Question

Question 2 (7 marks) You are the accountant for Go-Go-Grow Ltd, a children's electric toy car manufacturer that is located in Geelong and has customers in Australia and the USA. Their estimated current sales volume is 5,000 units per month and based on this level of production, the company has budgeted the following costs and prices per unit: Manufacturing Costs per unit (Based on production of 5,000 units per month) Direct Material Cost Direct Labour Cost Variable Factory Overhead Fixed Factory Overhead Total Manufacturing Cost Selling & Administrative Costs Variable Selling and Administrative Cost Fixed Selling and Administrative Cost Total Cost Per Unit S150.00 75.00 35.00 40.00 300.00 35.00 25.00 60.00 360.00 Selling Price Per Unit Mantel Ltd is an overseas company that sells toy cars all over the world, with the majority of their market to wealthy new parents in China and India. They have approach about obtaining a quote for a special one-off order as they would like to purchase 20,000 toy cars. As this will be a special order sale, there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred. ed Go-Go-Grow This order is because their existing supplier has suffered substantial earthquake damage to their premises, but the CEO of Mantel Ltd also hinted to your CEO that if they are satisfied with the product, this might not be the last deal between the two businesses. Required 1. Given this knowledge, what amount should Go-Go-Grow Ltd. bid for this contract in each of the following circumstances: a) The Go-Go-Grow's annual factory capacity is 90,000 units. b) The Go-Go-Grow's annual factory capacity is 75,000 units. (To fulfil the order, you may have to pull the product from your regular production). 2. Assuming that the annual factory capacity is 90,000 units, prepare a report for your CEO explaining your justification for the bid price that you came up with in I a). Discuss the possible opportunities and potential disadvantages with accepting this contract with Mantel. Give both quantitative and qualitative support to your discussion.

Answer 1

Solution:

we have to calculate the bid place of order in 2 circumstances When the capacity 90,000 units and when the capacity is 75,000 units.
Let us first down the details given in the question in a condensed form.

Current Sales Volume	5,000 units per month
Units Produced	5,000
Direct Material Cost	150
Direct Labor Cost	75
Variable Factory overhead	35
Fixed Factory Overhead	40
Total Manufactured Cost	300
Selling & Administrative Costs
Variable Selling and Administrative Cost	35
Fixed Selling	25
	60
Total Cost per Units	360
Selling Price per Unit	720

Current Sales Volume	5,000 units per month	Production per anum	Capacity is 90,000 units	Capacity is 75,000 units
Units Produced	5,000	60,000	60,000	60,000
No of Units Produced for Mantel			20,000	18,000
Total			80,000	78,000
			cost for 20,000 units	cost for 18,000 units
Direct Material Cost ( units *per unit cost $150)	150	9,000,000	3,000,000	2,700,000
Direct Labor Cost ( units * per unit cost $75)	75	4,500,000	1,500,000	1,350,000
Variable Factory Overhead (units * per unit cost $35)	35	2,100,000	700,000	630,000
Fixed Factory Overhead (units * per unit cost $40)	40	2,400,000	-	-
Total Manufacturing Cost	300	18,000,000	6,000,000	5,400,000
Selling & Administrative Costs
Variable Selling and Administrative Cost	35	2,100,000	-	-
Fixed Selling	25	1,500,000	-	-
Total Selling Cost	60	3,600,000	-	-
Total Cost per Unit (A)	360	21,600,000	7,200,000	6,480,000
Selling Price Per unit (B)	720	43,200,000
Net Profit (B - A)	360	21,600,000
Minimum Bid Price			7,200,000	6,480,000

As this will be a special order sale there will be no costs incurred for variable selling and administrative costs and no additional fixed costs will be incurred.