MAF551 – PRICING

Tutorial Question
Question 1

Easy Life Sdn Bhd is a company specializing in the production of supplementary food. One of
its highly demanded products is VLIFE. The company usually manufactures VLIFE within a
range of 30,000 to 50,000 units per month. The current production level is 48,000 units which
represents 80% of its capacity. The cost data based on the normal range of production is given
below:

Production (units) 30,000 50,000

RM RM
Direct materials 540,000 900,000
Direct labour 330,000 550,000
Indirect labour 132,000 192,000
Factory supplies 45,000 75,000
Machine repair and maintenance 64,000 96,000
Power 6,400 9,600
Electricity 9,800 9,800
Depreciation on machinery 22,000 22,000
Administrative expenses 72,000 72,000
Selling and distribution expenses 107,000 155,000

Required:

a. Calculate the following:-

i. Variable cost per unit
ii. Total fixed cost

b. Calculate the selling price per unit of for the current production of VLIFE based on the
following pricing policies:
i. Total variable costs plus 60% markup.
ii. Total cost plus profit margin of 30%.

c. List down any four (4) relevant factors that Easy Life Sdn Bhd should consider when
they determine the selling price for their product.

d. Pino Enterprise is interested in ordering 15,000 units of VLIFE at the price RM5I .00
per unit. lf the order is being accepted, the company has to incur additional cost of
RM3,000 for a slight change in the production setting. Variable selling and distribution
cost per unit for this order will only be charged at 50% of the normal order cost. If Pino
Enterprise accepts this offer, it will have to let go some of its current sales.

Required:
Suggest to management of Easy Life Sdn Bhd on the best decision by calculating the
minimum price for the offer, assuming that the company adopts the pricing policy as
per b(i) above.

Question 2

The following cost structure relates to the normal capacity of production and sales volume of
1,000 units of product Pre H2o, a domestic water filter for the current year.

Cost item: RM
 Direct labor 350,000
Direct materials 500,000
Manufacturing overheads:
Variable 150,000
Fixed 300,000

Additional information:

1. The variable selling and distribution overheads were absorbed at 20% of total
manufacturing costs.
2. The fixed administration overheads were recovered at 10% of the total manufacturing
costs.
3. Currently the management level use the full cost plus 30% mark up method in its
pricing policy.

Required:

a) List four (4) factors to be considered in pricing decision.

b) What is the current selling price per unit of product Pure H2o?
c) What will be the selling price per unit of the product, if the management wishes to
penetrate South Thailand’s market in near future?
d) If changes made on the pricing method to a full production cost plus 35% margin. What
will be the new selling price? Is it a wise decision to be implemented by the
management?

Question 3

Kebun Kaw Sdn Bhd will launch a new product namely 'meat ball' for domestic market. The
production capacity is budgeted within the ränge of 60,000 to 100,000 pieces. Currently,
Kebun Kaw Sdn Bhd is operating at 80% capacity.

The finance director of Kebun Kaw Sdn Bhd has suggested that a mark- up of 25% on variable
cost should be added for every piece sold. The cost data based on normal ränge of production
is given below:

Production units 60,000 pieces 80,000 pieces 100,000 pieces

RM RM RM
Direct materials 7,800 10,400 13,000
Indirect materials 9,000 11,400 13,800
Direct labour 10,200 13,600 17,000
Indirect labour 5,600 7,200 8,800
Fuel 7,000 9,000 11,000
Rent 7,000 7,000 7,000
Electricity and water 4,500 4,500 4,500
Distribution cost 2,500 2,500 2,500
Total Cost 53,600 65,600 77,600

Required:

a) Calculate the selling price of 'meat ball' per piece. Show clearly the Separation of
variable and fixed cost. (Round your answers to 2 decimal points)

b) Nurafiz Agro Mart approaches Kebun Kaw Sdn Bhd to deliver 27,000 pieces of
exclusive 'meat ball' at a special price of RM0.70. These exclusive pieces would be
packed in a special paper bag which cost RM0.05 per piece. In order to accept this
 special order, Kebun Kaw Sdn Bhd will need additional workers to do the packaging
and this will increase the labour cost by RM700. In addition, there will be a distribution
cost of RM150.

Evaluate whether the order should be accepted by Kebun Kaw Sdn Bhd? Calculate
the minimum selling price that should be charged to Nurafiz Agro Mart if the order is
accepted.

c) State two (4) factors to be considered in pricing decision.

Question 4

Agro Century Sdn Bhd is an established company that produces pickles in the northern
region of Malaysia. Due to current market demand, the company is planning to launch a new
product called mango pickle.

The following is the list of the expected cost of Agro Century Sdn Bhd to produce the mango
pickle based on three different levels of activity:

1,000 3,000 5,000

bottles bottles bottles
RM RM RM
Direct materials:
Mango 5,000 15,000 25,000
Vinegar 3,000 9,000 15,000
Indirect Material 5,000 10,000 15,000
Direct labour 8,500 25,500 42,500
Indirect Labour 3,500 6,900 10,300
Factory rental 6,500 6,500 6,500
Miscellaneous 1,650 3,450 5,250
Marketing and advertising 1,800 1,800 1,800
Supervisors salary 5,100 5,100 5,100

Agro Century Sdn Bhd has set 2,500 bottles of mango pickle as its normal production
because the product is still new in the market.

The current policy of Agro Century Sdn Bhd is to set the selling price at full cost plus 25%
mark-up. However, the cost accountant suggests that the company should use variable
production cost plus 60% margin for this product

Required:

a. Calculate the following:

i. The variable cost per bottle

ii. The total fixed cost
iii. The selling price per bottle of the mango pickle based on the company’s
current pricing policy at the normal level of production.
iv. The selling price per bottle of the mango pickle based on the cost
accountant’s suggestion at the normal level of production.

b. Based on your calculation in part (a) (iii) and (iv) above, propose to the
management of Agro Century Sdn Bhd on the best pricing policy, if the company
aims for profit maximisation (Assume the demand remains unchanged).