Jack Ltd expects its cost per unit, assuming a production level of 200,000 units per annum, to be:

Selling price is £15 per unit.

The following propositions are put to the managing director. Each proposition is to be considered on its own without reference to the other propositions.

(a) If the selling price is reduced to £14.80 per unit, sales could be raised to 240,000 units per annum instead of the current 200,000 units. Apart from direct materials, direct labour and indirect fixed manufacturing costs, there would be no change in costs.

(b) If the selling price is put up to £15.40 per unit, sales would be 160,000 per annum instead of 200,000. Apart from variable costs, there would also be a saving of £4,000 per annum in finance costs.

(c) To satisfy a special order, which would not be repeated, 10,000 extra units could be sold at £9.80 each. This would have no effect on fixed expenses.

(d) To satisfy a special order, which would not be repeated, 6,000 extra units could be sold for £9.20 each. This would have no effect on fixed expenses.

Draft a memo stating what you would advise the managing director to do, giving your reasons and workings.

Transcribed Image Text:

Direct materials Direct labour Indirect manufacturing costs: Variable Fixed Selling and distribution expenses Administration expenses Finance £ 3.2 4.8 1.6 0.8 0.4 0.6 0.2 14.0