The Rafan Company manufactures a product which is sold at Rs.16 each. Under present business conditions, the company is operating at 30% normal capacity with production and sales of 8,000 units per month. An analysis of costs for a recent month sows: Direct Materials Rs. 10,000 Direct Labor 12,000 Superintendent’s salary 5,000 Depreciation Building 2,000 Heat and light 500 Indirect labor 6,000 Deprecation of machinery 3,000 Machinery Repair 1,000 Fire Insurance 1,500 Miscellaneous 8,00 Factory Rent 5,000 Property Tax 400 Total Rs. 47,200 The total marketing expenses were Rs. 50,000, which included 3,000 for packing and shipping. The sales on the special order would require a similar unit cost for packing and shipping. The total administrative and general costs were Rs. 7,000. An offer has been received from a large chain store to purchase 96,000 units to be shipped in equal months each month during the coming year. These units would be manufactured with slight immaterial modifications under the chain store’s label. The price offered was Rs. 7.5 per unit. The Rafan Company management does not expect any improvement in business conditions and feels that the chain store’s sales will not affect Rafan sales. The management does not believe that it can afford to accept this offer, feeling that it would reduce the present operation profit. Required: An analysis required comparing the operating results, if the order is or is not accepted. Also Assume that the various items are either completely fixed or variable, depending upon the dominant characteristics of each item and the data given.
The Rafan Company manufactures a product which is sold at Rs.16 each. Under present business conditions, the company is operating at 30% normal capacity with production and sales of 8,000 units per month. An analysis of costs for a recent month sows:
Direct Materials
Rs. 10,000
Direct Labor
12,000
Superintendent’s salary
5,000
2,000
Heat and light
500
Indirect labor
6,000
Deprecation of machinery
3,000
Machinery Repair
1,000
Fire Insurance
1,500
Miscellaneous
8,00
Factory Rent
5,000
Property Tax
400
Total
Rs. 47,200
The total marketing expenses were Rs. 50,000, which included 3,000 for packing and shipping. The sales on the special order would require a similar unit cost for packing and shipping. The total administrative and general costs were Rs. 7,000.
An offer has been received from a large chain store to purchase 96,000 units to be shipped in equal months each month during the coming year. These units would be manufactured with slight immaterial modifications under the chain store’s label. The price offered was Rs. 7.5 per unit.
The Rafan Company management does not expect any improvement in business conditions and feels that the chain store’s sales will not affect Rafan sales. The management does not believe that it can afford to accept this offer, feeling that it would reduce the present operation profit.
Required:
An analysis required comparing the operating results, if the order is or is not accepted. Also Assume that the various items are either completely fixed or variable, depending upon the dominant characteristics of each item and the data given.
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