Fashion Co, a manufacturer of fashion garments, is investigating whether or not to accept a retailer's order
Question:
Fashion Co, a manufacturer of fashion garments, is investigating whether or not to accept a retailer's order for 100,000 winter coats which will be codenamed Winners.
The following information is available in relation to Winners:
(1) The 100,000 garments will be manufacture din batches of 1000 garments. Fashion Co has been offered a price of$50,000 for each batch of 1000 garments supplied to the retailer.
(2) New machinery costing $250,000 will have tobe purchased for this contract and it is estimated that this machinerywill have a value of $25,000 at the end of the contract.
(3) A 75% learning curve will apply for thefirst 60 batches of Winners after which a steady state production timewill apply. The labour time per batch after the first 60 batches willtherefore be equal to the time for the 60th batch. The cost of the firstbatch was measured at $15,000. This was for 1500 hours at $10 per hour.
(4)Variable overhead will be 30% of the direct labour cost.
(5)Given the above learning effect for labour,direct material will be $10,000 per batch for the first ten batches,$7,500 per batch for the next ten and $6,000 per batch thereafter.
(6) A new warehouse will have to be rented for three months to store Winners at a cost of $5,000 per month
Fashion Co is seeking to achieve a net profit equal to 80% of thesales revenue arising from the manufacture and sale of Winners.
Required:
(a)Prepare detailed calculations to show whether the targeted 80% net profit margin will be achieved.
(12 marks)
(b)Calculate what length of time the second batch will take if the actual rate of learning is
(i)70%
(ii) 80%
(5 marks)
(c)Suggest specific steps that Fashion Co could take to improve the net margin calculated above.
(8 marks)
Financial and Managerial Accounting
ISBN: 978-1285866307
13th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac