MANAGEMENT ACCOUNTING – ASSIGNMENT 2

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ASSIGNMENT 2

Chinwul & Son built a custom made pleasure boats that range in price from 10 million – 250million.  For the past 30 years, Mr. Chinwul Snr. Has established the selling price of each boat by estimating material cost, labour pro-rated portion of overhead and adding 20% of estimated cost.

A recent price quotation was determined as follows:

                                                              

          N000

Direct Material                                  5,000

Direct Labour                                     8,000

Overhead                                            2,000

Total Cost                                         15,000

Plus (20%)

i.              Reduce his mark-up to as little as 5% over estimated cost does average mark-up for the year is estimated at 15%

ii.    Mr. Chinwul Jr. has just completed a course on special pricing and believes the firm could use some of the techniques discuss in the course.  The Course emphasize the contribution margin approach to pricing, and Mr. Chinwul Jr. feels that such approach will be helpful in determining the selling price for their custom made pleasure boats.

iii.    Total overhead which includes selling and distribution expenses for the year, has been estimated at 150 million of which 90 million is fixed and the remainder variable in direct proportion to direct labour.

iv.    Assume the customer in the example rejected the 18million quotation and also rejected a 15, 750 million quotation (5% mark-up) during a slack period.

The customer countered with a 15million offer.

Required:

(a)    What is the minimum selling price Mr. Chinwul could have quoted without reducing or increasing company net income?

(b)   What is different in company net income for the year between accepting and rejecting the customers offer?

i.                      What advantage does the contribution margin approach to pricing have over the approach adopted by Mr. Chinwul Snr.

ii.                   What pitfalls are there if any, to contribution margin pricing?

SOLUTION:

MR. CHINWUL & SONS

Cost Statement

N’000

Direct Material                                                      5,000

Direct Labour                                                         8,000

Variable Overhead (2000 x 40%)                              800

Total Variable Cost                                               13,800

Profit (20% x 13,800)                                            2,760

                                                                             15,560

Total Overhead                 150million

Fixed Overhead               (90million)

Variable Overhead            (60milion)

TOTAL COST APPROACH:

N’000

Direct Material                                                       5,000

Direct Labour                                                         8,000

Overhead                                                                2,000

Total Cost                                                               15,000

Profit (20% x 15,000)                                              3,000

Selling Price                                                            18,000

(B)          Difference between Net Income of Accepting and Rejecting Customer’s offer;

                                                                                     N’000

Direct Material                                                                5,000

Direct Labour                                                                  8,000

Variable Overhead (2000 x 40%)                                       800

Total Variable Cost                                                         13,800

Profit (5% x 13,800)                                                          690

                                                                                     14,490

(i)                 18 million – 14,490million

(ii)               15,750 million – 14,490million

That is it students.  We are asked to do Assignment 1 and 2 and to be submitted next contact which comes up this week if the date remains.

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