An umbrella manufacturer makes an average profit of Rs. 2.50 per unit on a selling price of Rs. 14.30 by producing and selling 60,000 units at 60% of the potential capacity.

His cost of sales per unit is as follows:

Direct Material	3.50
Direct Wages	1.25
Factory Overheads	6.25 (50% fixed)
Sales Overheads	0.80 (25% variable)

During the current year, he intends to produce the same number but estimates that his Fixed Cost would go up by 10% while the rates of direct wages and direct materials will increase by 8% and 6%, respectively. However, the selling price cannot be changed. Under this situation, he obtains an offer for a further 20% of his potential capacity.

What minimum price would you recommend for acceptance of the offer to ensure the manufacturer with an overall profit of Rs. 1,67,300?

Answer rating: 100% (QA)

To determine the minimum price that the manufacturer should accept for the additional 20 of his potential capacity we need to calculate the breakeven ... View the full answer