Billingham manufactures microwaves to a selected few electrical retail outlets. The company is very image conscious and as a result command a premium price in the market place.
The sales team has managed to secure a large Spanish Distributor, but they are unwilling to purchase the deluxe cooker at the current price of £750 in the UK.
They have arrived at a price that is non-negotiable of £350 for an additional 1000 cookers. Using the cost data provided you have been asked to prepare a report showing the following:
Cost Data:
Direct Material Cost per Microwave £75
Direct Labour Cost per Microwave £40
Other Direct Expenses per Microwave £25
Fixed cost based on 700 Microwaves to be made in a year £70,000
a) The Full Cost of producing one Deluxe Model
b) Calculate the profit or loss to the company of selling 500 Microwave’s to the Spanish Distributor and 700 Microwave’s in the UK. Assuming that 700 Microwave’s have already been made and sold in the UK.
c) Make a recommendation to the board considering both the Financial, non-financial risks and opportunities of selling at the Spanish Distributors price.
Financial aspects make the Spanish deal as it adds to profits, it will increase profit and you have spare capacity.
Non-Financial – Brand, entry into new markets growth (penetration pricing)