Parker Ltd produce quality pens and pencils and it has been producing and selling 10,000 sets per month . It provides the following information because it has been facing increasing competition both in the local market and from imported products:
Manufacturing costs
Direct material $1 .00 per unit
Direct labour 1.20 per unit
Variable overhead 0.80 per unit
Fixed overhead $10,000
Marketing costs
Variable $1.50 per
unit
Fixed $15,000
Parker has been selling these pen and pencil sets for $7.50 each and has asked you to provide answers to the following.Each part is to be considered independently of the others.
Required :
(a) Assuming that all 10,000 pen and pencil sets produced in a month are sold calculate the monthly profit .
(b) A request has come from an educational institution for Parker to supply an extra 2,000 pens per month at a price of $5.50 per set.The educational institution want their logo inscribed on the pen and pencil set.This would cost an extra $0.60 per set.Should this one off request be accepted based on profit alone? Should any other factors be considered before accepting the order? What other factors should be considered ?
(c) Another request has come in the form of a long term government contract which wants you to supply 5,000 pen and pencil sets per month on an ongoing basis for $4 per set and a one off payment of $4,000. Should this offer be accepted? Provide reasons for your decision.
(d)Parker is trying to enter a foreign market. It believes it can sell an extra 10,000 pen and pencil sets in this market. If it produces this extra 10,000 sets it will be producing at maximum capacity.
What is the minimum price it could enter this market in the short term? What is the minimum price in the long term?
(e) Parker has an offer from an outside supplier which has offered to supply the 10,000 pen and pencil sets at $4.20 per set.Should you accept this offer? There are no alternative uses for the facilities and while the variable manufacturing costs would be saved you would only save $3000 per month on your fixed manufacturing costs and $0.40 per set off the variable marketing costs.Show calculations to support your answer.
(f) Assuming the same situation as in part ( e) above with the same savings in costs except that the facilities(building and car park)can be rented out and you receive $5,500 per month from this, should you accept the offer from the outside supplier now?Show calculations to support your answer.