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How do you decide if Gul Ahmed is earning a profit on Item 007at Rs.15 a meter? If you are the manager of the department that produces Item 007, would it be to your financial advantage to lower the price or keep it at the same level for 2018? (Provide support to your answer with figures, calculations, and logical reasoning).

Table1 Item 007, Prices and Production, 2012-2017

Volume of production(meters) Price (Pakistani Rupee)

Year Industry Total Gul Ahmed Competitor price Gul Ahmed price

2012 610,000 213,000 20.00 20.00

2013 575,000 200,000 20.00 20.00

2014 430,000 150,000 15.00 15.00

2015 475,000 165,000 15.00 15.00

2016 500,000 150,000 15.00 20.00

2017 625,000 125,000 15.00 20.00

Table 2: Estimated cost per meter of item 007 at various volume of production

Production volumes 75,000 100,000 125,000 150,000 175,000 200,000

Direct labourⁱ 4.00 3.90 3.80 3.70 3.80 4.00

Material 2.00 2.00 2.00 2.00 2.00 2.00

Material spoilage 0.20 0.20 0.19 0.19 0.19 0.20

Department Expense:

Directⁱⁱ 0.60 0.56 0.50 0.50 0.50 0.50

Indirectⁱⁱⁱ 4.00 3.00 2.40 2.00 1.71 1.50

General Overhead^iv 1.20 1.17 1.14 1.11 1.14 1.20

Factory Cost 12.00 10.83 10.03 9.50 9.34 9.40

Selling & Admin exp.^v 7.80 7.04 6.52 6.18 6.07 6.11

Total cost 19.80 17.87 16.55 15.66 15.41 15.51

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