Question 1: Target costing
Feedastudent Ltd are developing a Gift food service for students. Market research has indicated that customers would be willing to pay £50 for the product. The company usually expect a profit margin of 10% on products.
Fixed costs for marketing and promotion is expected to be £12,000 per year. The company expects orders for 3000 units this year. Food costs are expected to be £41 per unit. Packaging and administration costs are £2 per service.
Required:
Calculate whether Enterprise Ltd can expect to make a profit this year. [5 marks]
A reduction in the fixed costs of £4,000 could be achieved but this would result in a reduction of expected sales to 2000 per year. Would this reduce the cost gap and be a more profitable solution?
[5 marks]
Alternatively, cheaper food costing only £38 could be used but this may affect its reputation and result in fewer sales next year. Should Enterprise consider this? Give reasons for your answer and examples of how this could work. [5 marks]
Alternatively, packaging and admin could be outsourced to Amazonia for an initial payment of £1200 and thereafter a variable cost of £1 per item. Is this worth considering?
[5 marks]
Suggest other possible actions that Enterprise could take to enable them to make a profit.
[5 marks]
Question 2: Variable costing and absorption costing
Details of a company's first two years of operations are shown:
Year 1
Year 2
Sales @ £20
£1,000,000
£1,200,000
Opening stock in units
0
5000
Units produced
55000
55000
Units sold
XXXXXXXXXX
XXXXXXXXXX
Fixed selling and administrative expenses
£150,000
£150,000
The company's unit product cost is computed as follows:
£
Direct materials
4
Direct labou
7
Variable manufacturing overhead
2
Fixed manufacturing overhead (£220,000/55,000 units)
4
Unit product cost
17
Required:
1. Prepare a profit and loss account for each year using Absorption costing.
[9 marks]
Calculate what the profit would be each year if the company used Marginal costing.
[9 marks]
Reconcile the differences between the two profit figures and explain the circumstances in which one method may be more suitable than the other.
[7 marks]
Question 3 : CVP
A company makes two products, the variable costs are as follows;
Product A Product B
£ £
Direct materials 1 3
Direct labour (£6 per hour) 6 3
Variable overhead 1 1
8 7
The sale price of A is £14 and B is £11. During the month of July the availability of Direct Labour is limited to 5000 hours due to staff taking holidays. Sales demand is expected to be 3000 units of A and 5000 units of B.
Monthly fixed costs are £20,000 and opening stocks are zero.
Required:
1. Calculate the deficiency in labour hours for the month.
[4 marks]
Determine the priority ranking for production.
[4 marks]
Calculate the maximum profit that can be made next month
[8 marks]
Calculate the loss of profit due to this limiting factor and consider the maximum amount the company would be willing to pay,per hour for agency staff.
[9 marks]
Question 7: Standard costing
Is Standard costing still a useful tool for the Management accountant? How could it be adapted to suit the service sector?
[25 marks]