Question

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 curent 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 Administative Cost Total Cost Per Unit $150.00 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 approached Go-Go-Grow about obtaining a quote for a special one-off order as they would like to puchase 20,000 toy cars. As this will be a special order sale, there will be no costs incured for variable selling and administrative costs and no additional fixed costs will be incuured. 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 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 yor justification for the bid price that you came up with in 1 a). Discuss the possible opportunities and potential disadvantages with accepting this contract with Mantel. Give both quantitative and qualitative support to yor discussion.

Answer 1

Particulars	USD
Direct material cost	150
Direct labour cost	75
Variable factory overhead	35
Fixed Factor overhead	40
Total manufacturing cost	300
Selling and administrative costs
Variable selling and admistrative costs	35
Fixed Selling and administrative costs	25
Total Selling and administrative costs	60
Total cost per unit	360
	per month	per annumn
Current production	5000	60000	units
		per annumn
If Capacity		90000	units
Current demand		60000	"
		30000	"
Mantel demand		20000	"	Which is with in capacity limits
Therefore cost/unit
	USD
Direct material cost	150
Direct labour cost	75
Variable factory overhead	35
Fixed Factor overhead	0
Total manufacturing cost	260
Selling and administrative costs
Variable selling and admistrative costs	0
Fixed Selling and administrative costs	0
Total Selling and administrative costs	0
Total cost per unit	260
Margin Per unit	360	as taken from other customers
Selling price per unit	620	Bid for option 1 on capacity of 90000 units
Advantages
a) Will do additional sales of 20000 units and earn margin of 360 per unit on it
b) Capacity utilisation will be increased to 88% from 67%
c) Can offer competitive rates to new customer to fully utilise the capacity of 90000; i.e 10000 units can be sold at lower margin
d) Expectation of long term contract with Mantel
Disadvantages
a) Existing customer may ask to lower their prices if they have found that company is selling 20000 units at rate of 620/unit which is USD 100 /unit lower to the price sold to them
		per annumn
If Capacity		75000	units
Current demand		60000	"
		15000	"
Mantel demand		20000	"	Which is with in capacity limits
Therefore cost/unit
	Cost/unit	For 15000 units	Cost/unit	For 5000 units	For 20000 units
Direct material cost	150	2250000	150	750000	3000000
Direct labour cost	75	1125000	75	375000	1500000
Variable factory overhead	35	525000	35	175000	700000
Fixed Factor overhead	0	0	40	200000	200000
Total manufacturing cost	260	3900000	300	1500000	5400000
Selling and administrative costs
Variable selling and admistrative costs	0	0	35	175000	175000
Fixed Selling and administrative costs	0	0	25	125000	125000
Total Selling and administrative costs	0	0	60	300000	300000
Total cost per unit	260	3900000	360	1800000	5700000
Margin Per unit	360	5400000	360	1800000	7200000
Selling price per unit	620	9300000	720	3600000	12900000	645
If capacity is 75000 units , bid price would be Rs. 645/unit