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Question: A toy manufacturer earns an average net profit of Rs.3 per piece with a selling price of Rs.25 by producing and selling 60,000 pieces at 60% of the potential capacity. Composition of his cost is as follows:
Direct material Rs.4
Direct wages Rs.1
Works overhead Rs.6 (50% fixed)
Sales overhead Rs.1 (25% variable)
During the current year he intends to produce the same number but anticipates that:
(a) his fixed charges will go up by 10%
(b) rates of direct labour will increase by 20%
(c) rates of direct material will increase by 5%
(d) selling price cannot be increased.
Under these circumstances he obtains an order for a further 20% of his capacity. What minimum price will you recommend for accepting the order to ensure that the manufacturer gets an overall profit of Rs. 1,80,500?
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