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Is the price reduction advisable

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Question: Mathews pic anticipates that it will produce 5,000 units per annum at a selling price of £6.00 each. At that level of production, the costs will be:

                                                                 £

Direct materials                                           1.60

Direct labour                                               2.00

Factory overheads: variable                          0.80
                           fixed                              0.30

Fixed administration and selling overheads        0.50

Total cost                                                  5.20

(a) A customer has placed a special order and has requested a discount price of £5.00 per unit. Should this order be accepted?

(b) By reducing the selling price to £5.50 per unit, sales could be increased to 7,000 units without incurring additional fixed costs. Is this price reduction advisable?

Reference no: EM131626935

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