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(a) What do you understand by cost plus pricing? What are the advantages and disadvantage of the same ? (b) A manufacturing company, ABC Ltd. Has just completed a project with a capacity to manufacture 50,000 units per month and the same is ready for commercial production.
It has got an offer from another manufacturer to produce its products with Brand name by using the facility created. The Management is considering which of the two options, either to produce its own Brand or to manufacturer for others, it should accept.
The following Data are available:
Average selling price per unit Rs.3,500. (ii) Cost of material 75% of selling price. However, the company has engaged a firm to carry out Value Engineering and indications are that it may come down by 3% during 3 to 6 months next (iii) Power & Fuel-up to 15,000 units production/m. Rs.325 per unit; at 30,000 units production/m Rs.225 per unit (The Power & Fuel Cost per unit reduces on prorata basis with increase in production). (iv) (v) Indirect Material and consumables Rs.225 per unit. Fixed Cost per month:
(a) (b) (c)
Employment Cost Rs.50 lakhs Overheads (Administrative & Factory) Rs.15 lakhs. Overhead (Selling & Distb.) Rs.20 lakhs.
(vi) (vii) -
Variable Selling & Distribution Cost works out of 6% of Sale Price. Working Capital requirement @ 18% Interest. at level of production of 15,000 units/month Rs.10 crores. at level of production of 20,000 units/month Rs.12 crores. at level of production of 30,000 units/month Rs.20 crores.
. The other manufacturer would provide all Material other than an Indirect Material and consumables.700 per unit.The price offered by the manufacturer for carrying out conversion job is Rs. 20. 30. You are required to work out a Budget showing profitability under the two alternatives for three levels of production at 15.000 units/month and find out the best course of action as a short term measure and as a long term measure.000 units/month.000 units/month Bs.