Question

A company is currently manufactuing at only 60% of full practical capacity , in each of its two production Deppartment , due to a redution in the market share . the company is seeking to Launch a new product which it is hoped will recover some lost sales .

the estimaated direct cost of the new product , product X . are to be established from the following information :

Direct Material

every 100 unit of the product will require 30 Kg net of Material A . losses of the 10% of the material input are to be expected . Material A cost 5.40$ per Kg before discount , A quantity discount of 5% is given on all purchase if the monthly purchase quantity exceed 25000 kg . other materials are expected to cost 1.34$ unit of product X .

Direct labor ( per hundered unit )

Department one : 40 hours at 4.00$ per hour

Department two : 15 hours at 4.50$ per hour

Separated overhead absorption rate are established for each production Department .

Department 1 overhead are absorbed at 130% of Direct wages , which is based upon the expected overhead costs and usage of capacity if the product X is launched .

the rate in Department 2 is to be established as a rate per Direct labor hour also based on expected usage of capacity . the following annual figures for Departmnet 2 are based on full practical Capacity :

overhead : 5424000 $

Direct labor hours : 2200000 hour .

variable overhead in Department 1 are assessd at 40% of Direct wages and in Department 2 are 1980000 $ ( at full practical capacity ) .

non- production overhead are estimated as follows ( per units of product X) :

variable , 0.70$

Fixed , 1.95 $ .

the selling prices for the product X is expected to be 9.95 per unit , with annual sales of 2400000 units .

Required :

1- Determine the estimated cost per unit of product X

2- comment on the viability of product X

3- market reserach indicate that an alternative selling prices for the product x could be 9.45$per unit . at which prices annual sales would be expected to be 2900000 unit . Determie and comments briefly upon ,the the optimum selling price .

Answer 1