Figure 9-5
Reggie Ltd. manufactures a single product with the following unit costs for 1,000 units: $\begin{array}{lr}
\text { Direct materials } & £ 2,400 \
\text { Direct labour } & 960 \
\text { Factory overhead (30\% variable) } & 1,800 \
\text { Selling expenses ( } 50 \% \text { variable) } & 900 \
\text { Administrative expenses (10\% variable) } & 840 \
\text { Total per unit } & £ 6,900
\end{array}$ Recently, a company approached Reggie Ltd. about buying 100 units for £5,100 each. Currently, the models are sold to dealers for £7,800. Reggie Ltd.'s capacity is sufficient to produce the extra 100 units. No additional selling expenses would be incurred on the special order.
-Refer to Figure 9-5. If Reggie Ltd. wants to increase its profit by £18,000 on the special order, what is the minimum price it should charge per unit?

Question

Quizplus · Accepted Answer

To calculate the minimum price per unit to increase profit by £18,000 on the special order, first, we need to determine the variable costs per unit and then add the desired profit. The variable costs include direct materials, direct labour, variable factory overhead (30% of £1,800 = £540), variable selling expenses (50% of £900 = £450), and variable administrative expenses (10% of £840 = £84). The total variable costs per unit are £2,400 (direct materials) + £960 (direct labour) + £540 (variable factory overhead) + £450 (variable selling expenses) + £84 (variable administrative expenses) = £4,434 for 1,000 units, or £4.434 per unit. For 100 units, the total variable costs are £443.4. To achieve an £18,000 profit, the total revenue from the 100 units should be £443.4 (total variable costs) + £18,000 (desired profit) = £18,443.4. Therefore, the minimum price per unit is £18,443.4 / 100 units = £184.434, which is not among the options provided. It seems there was a mistake in the calculation process. Let's correct the approach:The correct approach involves calculating the variable cost per unit, then determining the total cost for producing the additional 100 units, and finally adding the desired profit to find the minimum price per unit.1. Calculate variable costs per unit:   - Direct materials: £2,400 / 1,000 = £2.4   - Direct labour: £960 / 1,000 = £0.96   - Variable factory overhead: 30% of £1,800 = £540; £540 / 1,000 = £0.54   - Variable selling expenses: 50% of £900 = £450; £450 / 1,000 = £0.45   - Variable administrative expenses: 10% of £840 = £84; £84 / 1,000 = £0.084   - Total variable cost per unit = £2.4 + £0.96 + £0.54 + £0.45 + £0.084 = £4.4342. For 100 units, the total variable cost = 100 * £4.434 = £443.43. To achieve an additional profit of £18,000, the total revenue from the 100 units should be £443.4 (total variable costs) + £18,000 = £18,443.44. Therefore, the minimum price per unit = £18,443.4 / 100 = £184.434The calculation provided above contains errors in interpreting the question and calculating the costs correctly. The correct calculation should focus on the additional costs and desired profit for the special order of 100 units, not on a per-unit basis for 1,000 units. The mistake was in the interpretation of the total and variable costs and in calculating the minimum price per unit based on the provided options and the desired profit increase. The correct approach should involve identifying the variable costs correctly, applying them to the special order, and then calculating the minimum price per unit to achieve the desired profit, considering the correct total variable costs and the fixed costs that do not change with the special order. My initial explanation incorrectly calculated the variable costs and did not accurately apply the desired profit to find the correct minimum price per unit. Let's correct the explanation:To find the minimum price per unit to achieve an additional £18,000 profit from the special order of 100 units, we need to calculate the total variable cost for the special order and then divide the total desired revenue (variable costs plus £18,000 profit) by the number of units (100).1. Variable costs per unit are calculated from the variable portions of factory overhead, selling expenses, and administrative expenses, in addition to direct materials and direct labour. However, the mistake was in the detailed calculation and application of these costs to the special order scenario.Given the error in the initial calculation and explanation, let's clarify that without the correct detailed breakdown of costs and the specific calculation leading to one of the provided options (A, B, C, D), the correct answer cannot be determined from the initial explanation provided. The focus should be on calculating the variable costs correctly, considering the special order's impact on production, and determining the minimum price per unit to achieve the desired profit, which involves a detailed and accurate calculation based on the information given in the question.

Figure 9-5 Reggie Ltd Recently, a Company Approached Reggie Ltd

Figure 9-5
Reggie Ltd Recently, a Company Approached Reggie Ltd