PRICING – PRACTISE QUESTIONS

BASIC QUESTION – MAY 2011

1. 6,000 Pen Drives of 2 GB are to be sold in a Perfectly Competitive Market to earn ` 1,06,000 Profit,
whereas in a Monopoly market only 1,200 units are required to be sold to earn the same profit. The
Fixed Costs for the period are ` 74,000. The Contribution per unit in the Monopoly Market is as high as
three fourths its Variable Cost. Determine the Target Selling Price under each market condition.

ROCE PRICING
2. Determine the selling price per unit to earn a return of 12% net on Capital Employed (Net of Tax at
40%) .The cost of production and sales of 80,000 units per annum are –
Material Rs.4,80,000
Variable Overhead Rs.3,20,000
Labour Rs.1,60,000
Fixed Overhead Rs.5,00,000
The Fixed portion of Capital Employed is Rs. 12 lakhs and the varying portion is 50% of Sales Turnover

ROI PRICING – PRACTISE MANUAL

3. An organization manufactures a product, particulars of which are detailed below –
Annual production (Units) 20,000
Cost per annum (Rs.)
Material 50,000
Variable cost 60,000
Fixed Cost 40,000
Apportioned Investment (Rs.) 1,50,000
Determine the Unit Selling price under the two strategies mentioned below. (Assume that the
organization’s Tax Rate is 40%) (a) 20% Return on Investment. (b) 6% profit on List Sales, When Trade
Discount is 40%.

PRACTISE MANUAL
4. The following data relating a new product is given .
Material
Iron 10 Kg at Rs 5/Kg
Copper 5 Kg at Rs. 8/Kg
Wages
Plant X 3 Hour @ Rs. 15/Hour
Plant Y - 5 Hour @ Rs. 12 / Hour
Overhead Recovery - On the basis of Direct Labour Hours
Fixed Overhead
Plant X - Rs. 8/Hour
Plant Y - Rs. 5/ Hour
Variable Overhead

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PRICING – PRACTISE QUESTIONS
Plant X - Rs. 8/Hr
Plant Y - Rs. 5/Hr
Selling Overhead - Rs. 20/Unit
• Find out the minimum price if the product is new to the market?
• After the Alloy is well established. What should be the minimum price and why?

COST PLUS PRICING → TOUGHEST QUESTION ON PRICING TILL DATE IN EXAM

5. C Ltd. An Indian Company has entered into an agreement of strategic alliance with M/s Z Inc. of USA ,
for the manufacture of personal computers in India, Broadly, the terms of agreement are –
• Z Inc. will provide C with kits in a dismantled condition. These will be used in the manufacture
of the personal computers in India. On a value basis , the supply, in terms of the FOB price, will
be 50% thereof.
• C will procure the balance of materials in India.
• Z Inc . will provide C with designs and drawings in regard the materials and supplies to be
procured in India.
For this, C will pay Z a technology fee of Rs. 3 Crores.
• Z Inc. will also be entitled to a royalty at 10% of the selling price of the computers fixed for
sales in India as reduced by the cost of standard items procured in India and also the cost of
imported kits from Z
C will furnish Z detailed quarterly returns.
Other Information available:
• FOB Price agreed is $510 . Exchange rate to be adopted is S1 = Rs. 47.059 (Note : In making
calculations, the final sum may be rounded off to the next rupee)
• Insurance and freight – Rs. 500 per imported kit
• Customs duty leviable is 150% of the CIF price; but as a concession, the actual rate leviable has
been fixed at 30% of CIF prices.
• The technology agreement expires with the production of 2,00,000 computers.
• The quoted price of kits includes a 20% profit margin on cost to Z Inc.
• The estimated cost of materials and supplies to be obtained in India will be 140% of the cost of
supplies made by Z Inc.
• 48% of the value in rupees of the locally procured goods represent cost of the standard items
• Cost of assembly and other overheads in India will be Rs. 2,000 per personal computer.
Calculate the selling price of a personal computer in India, bearing in mind that C has a targeted
profit of 20% to itself on the selling price.

TOUGH QUESTION
6. RST Ltd. Is a specialist in the manufacture of sports goods. They manufacture croquet mallets but
purchase the wooden balls, iron arches and stakes required to complete a croquet set.

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PRICING – PRACTISE QUESTIONS
Mallets consist of a head and handle. Handles use 2.5 board feet per handle at Rs. 50 per board foot.
Spoilage loss is negligible for the manufacture of handles. Heads frequently split and create
considerable scrap.

A head requires 0.40 board feet of high quality lumber costing Rs. 60 per board foot. Spoilage
normally works out to 20 % of the completed heads. 4% of the spoiled heads can be salvaged and
sold as scrap at Rs. 10 per spoiled head.

In the department machining and assembling the mallets, 6 men work 8 hours per day for 25 days in
a month. Each worker can machine and assemble 12 mallets per uninterrupted 40 minutes time
frame. In each 8 hours working day, 15 minutes are allowed for coffee-brake, 8 minutes on an
average for training and 9 minutes for supervisory instructions. Besides 10% of each day is booked as
idle time to cover checking in and checking out changing operations, getting materials and other
miscellaneous matters. Workers are paid at a comprehensive rate of 6 per hour.

The department is geared to produce 20,000 mallets per month and the monthly expenses of the
department are as under:

PARTICULARS AMOUNT
Finishing and Painting of Mallets 20000
Lubricating oil for cutting machines 600
Depreciation for cutting machines 1400
Repairs and Maintenance 200
Power to run the machines 400
Plant managers salary 9400
Other overheads allocated to department 60000
As the mallets are machined and assembled in lots of 250, prepare a total cost sheet for one lot
and advise the management on the selling price to be fixed per mallet in order to ensure a
minimum 33.33 % margin on the selling price.

HOME WORK FROM PRACTISE MANUAL

• EXCEL LTD
• RT LTD
• GENIE CARPETS

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