A company manufactures two models of a pocket calculator: The basic model sells for N$55, has a direct material cost of N$12.50 and requires 2.5 hours of labour time to produce. The other model, the Scientist sells for N$75, has a direct material cost of N$16.30 and takes 3.75 hours to produce. Labour, which is paid at the rate of N$60 per hour, is currently very scarce, while demand for the company’s calculators is very heavy. The company is currently producing 80 000 of the basic model and 40 000 of the Scientist model per month, while fixed costs are N$240 000 per month. An overseas customer has offered the company a contract, worth N$350 000, for a number of calculators made to its requirement. The estimating department has ascertained the following facts in respect of the work: The labour time for the contract would be 12 000hrs The material cost would be N$90 000 plus the cost of a particular component not normally used in the company’s models. These components could be purchased from a supplier for N$25 000 or alternatively, they could be made internally for a material cost of N$10 000 and an additional labour time of 1 500 hours. Required: What action should management take?
A company manufactures two models of a pocket calculator: The basic model sells for N$55, has a direct material cost of N$12.50 and requires 2.5 hours of labour time to produce. The other model, the Scientist sells for N$75, has a direct material cost of N$16.30 and takes 3.75 hours to produce. Labour, which is paid at the rate of N$60 per hour, is currently very scarce, while demand for the company’s calculators is very heavy. The company is currently producing 80 000 of the basic model and 40 000 of the Scientist model per month, while fixed costs are N$240 000 per month. An overseas customer has offered the company a contract, worth N$350 000, for a number of calculators made to its requirement. The estimating department has ascertained the following facts in respect of the work: The labour time for the contract would be 12 000hrs The material cost would be N$90 000 plus the cost of a particular component not normally used in the company’s models. These components could be purchased from a supplier for N$25 000 or alternatively, they could be made internally for a material cost of N$10 000 and an additional labour time of 1 500 hours. Required: What action should management take?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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QUESTION 1
A company manufactures two models of a pocket calculator: The basic model sells for N$55, has a direct material cost of N$12.50 and requires 2.5 hours of labour time to produce. The other model, the Scientist sells for N$75, has a direct material cost of N$16.30 and takes 3.75 hours to produce.
Labour, which is paid at the rate of N$60 per hour, is currently very scarce, while demand for the company’s calculators is very heavy. The company is currently producing 80 000 of the basic model and 40 000 of the Scientist model per month, while fixed costs are N$240 000 per month.
An overseas customer has offered the company a contract, worth N$350 000, for a number of calculators made to its requirement. The estimating department has ascertained the following facts in respect of the work:
- The labour time for the contract would be 12 000hrs
- The material cost would be N$90 000 plus the cost of a particular component not normally used in the company’s models.
- These components could be purchased from a supplier for N$25 000 or alternatively, they could be made internally for a material cost of N$10 000 and an additional labour time of 1 500 hours.
Required:
What action should management take?
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