Question

A company BB Ltd makes a product, selling for 20 pence - a can of baked beans. A major supermarket who currently buys their baked beans from a rival baked bean company asks BB Ltd if they will provide them with ‘Own Label’ baked beans for 16 pence a can, the costs of manufacture are as follows:

BB Baked Beans: Costs per can
Direct Materials 4p
Direct Labour 4p
Variable Overheads 3p
FO 4p
Manufacturing Absorption Cost 15p
Advertising 1p
Transport costs (variable) 1p
Total Cost 17p
Should they supply the Supermarket at this price (16p)?
What reservations would you have?

Answer 1

The total cost of the product is estimated to be 17p. Meanwhile, the idea of supplying it at 16p is not a sensible choice to make in order to be profitable. The product should be supplied at a price so that the business can cover its costs and earn profits from it.

The product must be supplied at a price that is higher than its cost.

They should keep a profit margin of at least 1 penny or higher.