Produc t cop Rs Sellin g price Rs contribut ion per unit sales price cop Rs

Produc t cop rs sellin g price rs contribut ion per

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Produc t cop Rs. Sellin g price Rs. contribut ion per unit (sales price- cop) Rs. volum e in units total contribu tion Rs. less fcty fixed cost per month Rs. less S and D fixed cost per month Rs. less variab le S & D cost per month Rs. net contrb ton at Co. level M3 6 12 6 17 lacs 102 lacs N2 7 14 7 13 lacs 91 lacs O5 4 11 7 14 lacs 98 lacs 291 lacs 20 lacs 25 lacs 10.8 lacs 235.2 lacs 90
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PRICING At first sight one would observe that the net amount in hand against the export order would be Rs. 6.20 for N2 whose cop is Rs. 7.00. Obviously one would not entertain an enquiry where the net realization is less than the cost of production. But if we look deeper, we observe that in the cost of production of Rs. 7 for N2, an amount of Rs. 1.25 of machine utilization charges is included. If this amount is taken separately then the variable component is Rs. 5.75, and the net amount being realised at an exchange rate of $ = Rs. 48 is Rs. 6.20, which is generating a margin of Rs. 0.45 per unit, which when multiplied by 22 lacs units would yield a profit of Rs. 9.90 lacs. However for producing this extra quantity of 22 lacs of N2, the factory will incur additional machine standing charges. As per the situation prevailing, the current level of production of 44 lacs units is taking place under standing charges of Rs. 55 lacs, which would become Rs. 66 lacs, if production is raised beyond current levels till 150 percent of existing capacity ie. production upto 66 lacs units. Hence if the export order is accepted, the company has to incur an additional standing charge of Rs. 11 lacs. One can see that the current level of production and sales after absorbing the standing charge of Rs. 55 lacs, is generating a profit of Rs. 235.2 lacs per month at the overall company level. Hence the export order will have to take care of the additional standing charges of Rs. 11 lacs for this order of 22 lacs pieces of N2. The detailed calculation earlier has shown a net profit of Rs. 9.9 lacs after accounting the variable cost of production. Thus the export order will not be able to cover Rs. 1.1 lacs of extra machine standing charges. At this stage one has to evaluate the scenario from a slightly different perspective. Purely from an accountant’s point of view, one would reject the export order, because the sale is going to result in a loss of Rs. 1.1 lacs which is the uncovered standing charge for the additional production. 91
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PRICING But a marketer would also view the export order as an opportunity to open into a new market, particularly in the light of the background information that the domestic market is likely to become more and more competitive. Additionally, one must weigh the following factors: 1. the company is making a comfortable profit of Rs. 235.2 lacs in the domestic market, out of which the export order will make a dent of just Rs. 1.1 lacs, at which cost the company will get an opportunity to open up in a foreign market 2. the overall realisation at the export price is Rs. 6.20 which is above the variable cost of Rs. 5.75, in other words the bare variable cost is being covered 3. against Rs. 55 lacs machine standing charges at a production level of
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