The overhead expenses of a factory producing a single article at different operating levels are as follows:
|
Operating-level Capacity |
Works Overhead (Rs.) |
|
80% |
36,000 |
|
100% |
40,000 |
|
120% |
50,000 |
|
60% |
33,000 |
The factory is currently working at 60% operating level and its annual sales amount is Rs. 1,44,000. Selling prices have the following relationship with costs at this level:
|
Factory cost |
66.67% of sales value |
|
Prime cost |
75% of factory cost |
|
Administration and selling expenses (of which 75% is variable) |
20% of sales value |
The management receives an offer for carrying out some work for another company valued at Rs. 33,000 per annum, which will take up 40% capacity. The prime cost of the work is estimated at Rs. 20,000. There will be an addition to administration expenses of Rs. 1,500 per annum.
The sales manager estimates that the sales of the company’ own product will increase to 80% capacity by the time the new order materializes.
Calculate the profit of the current production. Give your views, supported by figures, on the advisability of taking on the new work.