Q: How do you decide if Gul Ahmed is earning a profit on Item 007 at Rs.15
Question:
Q: How do you decide if Gul Ahmed is earning a profit on Item 007 at Rs.15 a meter? If you are the manager of the department that produces Item 007, would it be to your financial advantage to lower the price or keep it at the same level for 2018? (Provide support for your answer with figures, calculations, and logical reasoning)
Table 1 Item 007, Prices and Production, 2012 – 2018
Year | The volume of Production (meters) | Price (Rs) | ||
Industry total | Gul Ahmed | Competitor | Gul Ahmed | |
2012 | 610,000 | 213,000 | 20 | 20 |
2013 | 575,000 | 200,000 | 20 | 20 |
2014 | 430,000 | 150,000 | 15 | 15 |
2015 | 475,000 | 165,000 | 15 | 15 |
2016 | 500,000 | 150,000 | 15 | 20 |
2017 | 625,000 | 125,000 | 15 | 20 |
2018 | 700,000 | 175,000 | 15 | 15 |
Production volumes | 75,000 | 100,000 | 125,000 | 150,000 | 175,000 | 200,000 |
Direct Labor | 4 | 3.9 | 3.8 | 3.7 | 3.8 | 4 |
Material | 2 | 2 | 2 | 2 | 2 | 2 |
Material Spoilage | 0.2 | 0.2 | 0.19 | 0.19 | 0.19 | 0.2 |
Department expense | ||||||
Direct | 0.6 | 0.56 | 0.50 | 0.50 | 0.50 | 0.50 |
Indirect | 4 | 3 | 2.4 | 2 | 1.71 | 1.5 |
General Overhead | 1.2 | 117 | 1.14 | 1.11 | 1.14 | 1.2 |
Factory cost | 12 | 10.83 | 10.03 | 9.50 | 9.34 | 9.40 |
Selling and admin exp. | 7.8 | 7.04 | 6.52 | 6.18 | 6.07 | 6.11 |
Total cost | 19.8 | 17.87 | 16.55 | 15.66 | 15.41 | 15.51 |
Should the price for 2018 be kept at 15 Rs or should it be increased to 20 Rs?
Fundamentals of Corporate Finance
ISBN: 978-0071051606
8th Canadian Edition
Authors: Stephen A. Ross, Randolph W. Westerfield