Q1: (Chapter 2 – Relevant Costing) Omega Ltd is a manufacturer of various types of electric units.
Recently one of its large customers, Mars Ltd has offered a contract to Omega Ltd for the supply of 770 units.
Below are the details for the production of each unit:
Material X: 3kg is required per unit. Currently 2,300 kg is held by the business and it is constantly used. This material of was originally bought for £65 per kg. It would cost £67 per kg to replace it. Sales value is £54 per kg.
Material Y: 6 kg is required per unit. Currently 3,400 kg is held by the business. This material of was originally bought for £41 per kg. The material was not used by the business for last two years. Its scrap value is only £16 per kg. Replacement cost for material Y is £28 per kg.
The only foreseeable alternative use is as a substitute for material K (in constant use) but this would involve further processing cost of £5 per kg. The current buying cost of material K is £19 per kg.
Material Z: 2kg is required per unit. It is regularly used by the business and currently there is none available in the business. An order for 700 kg is shortly to be placed for another project by the business.
The price for this material is £80 per kg, but the supplier allows a bulk discount of 10%, for the entire order, for orders of 2,000 kg and above.
Skilled labour: Each unit requires 4 hours of skilled labour. It is currently paid at a rate of £27 per hr and skilled labour is hired on a permanent basis. 930 hours can be provided by members of staff who currently have no work to do due to a quiet time, but still employed by the company.
Only taking staff off other work can provide the remaining hours needed for this new project. This other work is charged out to customers at £75 an hour and material cost is £15 per hour.
Semi-skilled labour: Each unit requires 2 hours of semi-skilled labour. It is currently paid £11 per hour. If the required semi-skilled labour for this project is provided by the existing members of staff who are busy, the business will have to hire new employees at a rate of £14 per hour.
Specialised study: To derive the above estimates, the business had to spend £5,200 on a specialised study. If the contract does not proceed, the results of the study can be sold for £3,100 in the market.
Overheads: It is Omega’s policy to charge a share of the general costs (rent, heating and so on) to each contract undertaken at the rate of £15 for each skilled labour hour used on the contract. If this project is undertaken, the general costs are expected to increase as a result of undertaking the contract by £3,100.
Required
Calculate the minimum price at which the contract could be undertaken by Omega Ltd. For each part, you should clearly show supporting workings and provide a brief explanation for your choice.
Q2: (Chapter 3
Dragon Ltd produces one type of furniture set and the details per month are as follows:
Selling Price (per unit): £3,400
Variable cost per unit (including labour,
material and other costs £1,600
Fixed cost per month £774,000
Budgeted production/sales per month (in
units) 750
A. Calculate profit or loss expected if budget of selling 750 units is to be achieved.
B. Calculate how many units need to be sold per month in order to achieve break even point (BEP)
C. If shop aims to make a profit of £630, 000 per month, how many units should be sold per month.
D. Calculate margin of safety in units as well as percentage terms.
Q3: (Chapter 3)
Bravo Ltd provides a single standard service.
The business’s results for the past two months are as follows:
April May
Sales (Units) 2,200 2,800
Sales revenue (£) 198,000 252,000
Operating profit (£) 28,000 52,000
There were no changes, of any description, in selling prices or costs over the two months.
Required:
A. Given the total cost and activity levels in terms of sales units per each month, identify variable and fixed cost using high-low method.
B. What is the break-even point for the business’s activities?
C. Calculate contribution margin ratio %.
D. Calculate margin of safety for each month in units as well as percentage terms.
Q4: Zebra Ltd (Extra Practice Question)
It has three products all of which require the same production facilities.
Financial data on the three products are as follows:
Product X Y Z
£ per unit £ per unit £ per unit
Selling price 190 132 95
per unit (£)
Variable Cost per unit (£):
Direct material per unit (£) 40 35 22
Direct Labour per unit (£) 30 15 8
Other variable cost per unit (£) 10 10 5
Share of fixed cost per unit (£) 30 30 30
Monthly demand in units (units) 120 180 200
Machine time per unit (hours) 11 6 4
The same machine is used to produce all three products and hence, fixed cost is not affected. Fixed cost is £14,300 per month for all production.
Machine time is limited to 2,320 hours per month. Labour is a variable cost for this project.
Required:
With supported workings, show which combination of products to be produced to achieve the highest profit for the company.
Clearly show your workings which shows the no of units to be produced, total contribution and total profit.
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