A construction firm is considering to execute a structural modification project in a running manufacturing mill. Due to technical reasons, the work is to be executed slowly and carefully. It is expected that only 20 tons of fabrication is possible in each month. The firm has an estimated fixed cost (equipment, supervision, overhead deployment) of ₹ 1,50,000 per month, variable cost (labour and material) of ₹ 30,000 per month and ₹ 35,000 for normal cost of fabrication. What is the rate that should be quoted by the firm to achieve at least 10% profit ?
- A₹ 35,000
- B₹ 41,000Correct
- C₹ 45,000
- D₹ 49,000
Solution
Concept
Rate = (fixed cost per unit + variable cost per unit) × (1 + profit)
Formula
Rate = (F/N + v)(1 + p)
Step-by-step solution
1. Fixed cost per ton = 1,50,000 / 20 = ₹ 7,500. 2. Variable cost per ton = ₹ 30,000. 3. Cost per ton = 7,500 + 30,000 = ₹ 37,500. 4. Rate with 10% profit = 37,500 × 1.10 = ₹ 41,250 ≈ ₹ 41,000 per ton.
Explanation
Because the production rate is only 20 tons a month, the fixed overheads are spread over just 20 tons. That raises the cost per ton above the normal ₹ 35,000 rate, so the quoted rate must be higher.
Why the other options are wrong
₹ 35,000 is the normal rate with no allowance for the low production and the 10% profit. ₹ 45,000 and ₹ 49,000 overshoot the required 10% margin on the ₹ 37,500 cost.
Shortcut
Spread the fixed cost over the actual output: 150000/20 = 7500; add variable; add 10%.
Common mistake
Quoting the normal rate of ₹ 35,000.
Correct answer: B) ₹ 41,000