Prestea Ghana Limited (PGL) produces a single product, Ore. Operating at full capacity, the company can produce 250,000 units per year. Costs associated with this level of production and sales are given below: Unit Total GH₵ GH₵ Direct materials 30 7,500,000 Direct labour 40 10,000,000 Variable overhead 5 1,250,000 Fixed overhead 15 3,750,000 Variable selling expenses 10 2,500,000 Fixed selling expenses 20 5,000,000 120 30,000,000 Page 5 of 6 REQUIRED: (A)A government agency would like to make a one-time-only purchase of 50,000 units. The agency would pay a fixed fee GH₵2.00 per unit, and in addition it would reimburse PGL for all costs of production associated with the units. There would be no variable selling expenses associated with this order. You may assume that due to a recession, sales of the products have slumped down to only 200,000 units per year. If PGL accepts the agency’s business, how much will profits be increased or decreased from what they would be if only 200,000 units were produced and sold? (B)Assume the same situation as that described in (a) above, except that the company is currently selling 250,000 units each year through regular channels. Thus, accepting the agency’s business would require giving up regular sales of 50,000 units. If the agency’s business is accepted, by how much will profits be increased or decreased from what they would be if the 50,000 units were sold through regular channels? [
Prestea Ghana Limited (PGL) produces a single product, Ore. Operating at full
capacity, the company can produce 250,000 units per year. Costs associated with
this level
of production and sales are given below:
Unit Total
GH₵ GH₵
Direct materials 30 7,500,000
Direct labour 40 10,000,000
Variable
Fixed overhead 15 3,750,000
Variable selling expenses 10 2,500,000
Fixed selling expenses 20 5,000,000
120 30,000,000
Page 5 of 6
REQUIRED:
(A)A government agency would like to make a one-time-only purchase of
50,000 units. The agency would pay a fixed fee GH₵2.00 per unit, and in
addition it would reimburse PGL for all costs of production associated with
the units. There would be no variable selling expenses associated with this
order. You may assume that due to a recession, sales of the products have
slumped down to only 200,000 units per year. If PGL accepts the agency’s
business, how much will profits be increased or decreased from what they
would be if only 200,000 units were produced and sold?
(B)Assume the same situation as that described in (a) above, except that the
company is currently selling 250,000 units each year through regular
channels. Thus, accepting the agency’s business would require giving up
regular sales of 50,000 units. If the agency’s business is accepted, by how
much will profits be increased or decreased from what they would be if the
50,000 units were sold through regular channels?
[
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