Question [CA Final Dec-12]

Quality Plastics Limited (QPL) produces plastic bodies of various appliances according to the customers’
specifications. It has received an order for supply of 10,000 plastic bodies of a washing machine. The supply is to be
made within 30 days. The following information is available:
(i) QPL carries out production process in batches of 100 units each. Cost of the first batch is estimated as under:

(ii) It is estimated that due to learning curve effect, completion of the first, second, third and fourth batch would
require 200, 160, 148 and 140 hours respectively. This learning effect would continue till completion of 64
batches only. Learning effect at various learning levels is as under:

(iii) It is estimated that after completion of the first 16 batches, material input losses would be reduced from 10%
to 6%.
(iv) QPL works a single shift of 8 hours per day. For the above order, QPL can spare 8,000 direct labour hours.
Overtime hours can be worked at 1.5 times the normal rate. During the overtime hours, overheads would be
1.25 times the normal rate.
Required:
Compute the price that QPL should quote in order to earn a margin of 25% of the selling price.
Solution

10,000 plastic bodies will be produced in 100 batches (i.e. 100 units per batch).

Sale price to be quoted Rs.

Direct material:
- First 16 batches [66,000 x 16] 1,056,000
- Next 84 batches [66,000 x 0.9/0.94 x 84] 5,308,085

Direct labor:
- Basic wages for normal hours [220(W-1) x 8,000(W-2)] 1,760,000
- Overtime [330(W-1) x 2,062(W-2)] 680,460

Overheads:
- For normal hours [150(W-3) x 8,000(W-2)] 1,200,000
- For Overtime hours [187.5(W-3) x 2,062(W-2)] 386,625

Total cost of contract 10,391,170

Total price of contract [10,391,170 ÷ 75%] 13,854,893

Workings
W-1 Wage rates Rs.
Basic rate [44,000 ÷ 200] 220.00
Overtime rate [220 x 1.5] 330.00

W-2 Labor hours

W-2.1 Learning rate

Avg.
Cumulative Cumulative
cumulative
batches total time
time per batch

1 200 200.00

2 [200 + 160] 360 180.00

3 [360 + 148] 508 169.33 LR = 180/162 = 90%
4 [508 + 140] 648 162.00

W-2.2 Labor hours

Labour Hours for First 64 batches Y= axb
200 x 64-0.152
106.29
[106.29 x 64] 6,802.56 Hours
Labour Hours for First 63 batches Y= axb
200 x 63-0.152
106.54
[106.54 x 63] 6,712.02 Hours
Hours for 64th batch [6,802.56 - 6,712.02] 90.54 Hours

Hours
For 1st 64 batches 6,802.56
For next 36 batches [90.54 x 36] 3,259.44
Total hours required 10,062.00
Normal hours available (8,000.00)
Overtime hours required 2,062.00

W-3 Overheads rate Rs.

Basic rate [30,000 ÷ 200] 150.00
Overtime rate [150 x 1.25] 187.50