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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...

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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.
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
    Opening stock in units
    Units produced
    Units sold
    Fixed selling and administrative expenses
The company's unit product cost is computed as follows:
    Direct materials
    Direct labou
    Variable manufacturing overhead
    Fixed manufacturing overhead (£220,000/55,000 units)
    Unit product cost
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.
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]
Answered Same Day May 27, 2021


Chirag answered on May 27 2021
144 Votes
        PER UNIT
    Selling Price    50
    Less: Profit @10%    -5
    Target Cost    45
    Total Cost    PER UNIT
    Food Cost    41
    Packaging &
    Administration Cost    2
    Marketing & Promotion    4
    Total Cost    47
    a) Feedastudent Ltd is not expected to make a profit margin @ 10% since total cost is more than target cost
    However profit is expected to be less than 10% (i.e. 3/50*100=6%)
    b) Fixed cost of Marketing & Promotion cost on per unit basis is same which is 4 (8000/2000 units=4 per unit)
    Hence there will be no reduction in cost gap & will no longer be a proitable solution.
    c) Food Cost @ 38
    Selling Price    50
    Less: Variable Cost
    Food Cost    38
    Packing & Administration    2
ution Per unit    10
    Example    3000 units    1500 units
ution     30000.00    15000.00
    Less: Fixed Cost    -12000.00    -12000.00
    Profit    18000.00    3000.00
    From tha above example we can see that decrease in units will reduce contibution amount in totality & the
y profit since fixed cost in total remains the same.
    Hence the Enterprise should not consider this.
    d)    Original     Amazonia
    Selling Price    50    50
    Less: Variable Cost
    Food Cost    41    41
    Packing & Administration    2    1
ution Per unit    7    8
    Units @ 3000    Total    Total
    Contibution     21000    24000
    Less: Fixed Cost
    Marketing & Promotion    12000    12000
    Packaging & Admin    0    1200
    Profit    9000    10800
    Since the profit has been increased by 1800, it is worth considering the above proposal
    e) Other Possible Actions
    1. Using cheaper materials to make the product, where this does not affect product quality.
    2. Deciding to exclude design features on the product that do not add any value to the customer.
    3. Acquring new, more efficient techniques...

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