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Painter Ltd, which manufactures and sells a single product, is currently producing and selling 102,000 units per month, which represents 85% of its full capacity. Total monthly costs are Rs619,000 but at full capacity these would be Rs700,000. Total fixed costs would remain unchanged at all activity levels up to full capacity. The normal selling price of the product results in a contribution to sales ratio of 40%. A new customer has offered to take a monthly delivery of 15,000 units at a price per unit 20% below the normal selling price. If this new business is accepted, existing sales are expected to fall by one unit for every six units sold to this new customer.
Required:
(a) For the current production and sales level, calculate:
(i) the variable cost per unit; (ii) the total monthly fixed costs; (iii) the selling price per unit; (iv) the contribution per unit.
(b) Calculate the net increase or decrease in monthly profit which would result from acceptance of the new business. (c) In the context of decision making, explain the term 'opportunity cost' and illustrate your answer by reference to Painter Ltd.
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