Contribution costing - numerical questions
Question 1
Medallion Meats Ltd
Medallion Meats makes sausages in a single factory. It has a policy of having a range of 6 sausages on sale at any one time. Its Research and Development team has just developed two new varieties.
The Board has to consider the position at the next Board Meeting and decide which sausages it will sell for the next year and which sausages it will stop making.
You are the Brand Manager for sausages, and you are expected to recommend the new range to the Directors at that meeting. Considering the following data, prepare a Board Paper giving and supporting your recommendations.
E1 to E6 are the existing sausages and N1 and N2 are the new varieties.
| E1 | E2 | E3 | E4 | E5 | E6 | N1 | N2 | |
|---|---|---|---|---|---|---|---|---|
| Price | 10.50 | 12.70 | 13.80 | 9.27 | 15.80 | 26.10 | 13.20 | 32.50 |
| Variable cost | 3.50 | 6.80 | 5.20 | 3.37 | 9.26 | 18.10 | 5.00 | 16.50 |
| Sales | 100 | 200 | 80 | 250 | 300 | 100 | 500 | 100 |
What non-financial factors that should be taken into consideration in the decision-making process?
Question 2
Floodlight plc
Floodlight plc makes lamps and pylons for roads, car parks and sports stadiums. It makes a standard unit at its main factory and specialised lighting at a smaller industrial unit.
It has capacity to produce 20,000 units per year of its standard product. The factory has fixed costs of $10 million per year and variable costs of $500 per unit. It is three quarters through the current trading year and has sold only 10,000 units to date. The current selling price of the standard unit is $1,300.
The firm has received an order from a new customer for 5,000 units at a special price of $1,000 each.
There is considerable doubt at Board level over this order. Some of the Directors think they will be selling at a loss and believe the standard unit should sell as the fixed, standard price or not at all. The remaining Directors, however, think this order has merit.
Consider the evidence, and then advise the Board what it should do.
Question 3
Worf Ltd manufactures umbrellas. The cost of producing an umbrella is as follows:
| $ | |
|---|---|
| Materials ($2 per metre) | 2 |
| Labour ($4 per hour) | 4 |
| Other variable costs | 1 |
The fixed costs for the year are expected to be $150,000.
Each umbrella sells for $11 and the firm expects to sell 50,000 umbrellas each year.
The production manager intends to purchase new machinery, which will allow the umbrellas to be produced in 50% of the time taken previously. Staff will need training to operate new machinery and this trading will imply a one-off increase to fixed costs of $50,000.
(a) Calculate the contribution per unit, both before and after the introduction of the proposed change.
(b) Calculate the expected total contribution if the firm's sales expectations are met - both before and after the proposed change.
(c) Calculate the expected profit if the firm's sales expectations are met - both before and after the proposed change.
Question 4
Hawkins Ltd manufactures computer desks.
At its existing output, its variable costs are as follows:
| $ | |
|---|---|
| Materials | 20 |
| Labour ($5 per hour) | 15 |
| Other variable cost | 9 |
The fixed costs for the year are expected to be $190,000.
Each desk sells for $60. The company expects to sell 15,000 desks each year.
The manager intends to purchase new equipment which will reduce the time taken to produce each desk by one third. The equipment will cost $65,000.
(a) Calculate the contribution per desk sold:
(i) Before the purchase of the equipment
(ii) After the purchase of equipment
(b) Calculate the expected profits earned for the year:
(i) Before the purchase of the equipment
(ii) After the purchase of equipment
Question 5
Consider the following data for a firm producing kitchen equipment:
| Microwave ovens | Food Processors | Toasters | |
|---|---|---|---|
| Per unit | $ | $ | $ |
| Selling price | 7.00 | 10.00 | 13.00 |
| Labour cost | 2.00 | 4.00 | 6.50 |
| Materials cost | 3.00 | 2.50 | 4.50 |
| Other direct costs | 1.00 | 1.50 | 2.00 |
The following data relates to the expected production for the next financial period.
| Units | |
|---|---|
| Microwaves | 2000 |
| Food processors | 3000 |
| Toasters | 2500 |
(a) Produce a table which shows the total contribution per product.
(b) Produce a report which evaluates the argument that production of toasters should be halted.
Make or buy decision
Question 6
Simeon Ltd manufactures a range of educational products. An increasingly important product in its range is an interactive whiteboard for schools and colleges. Data relating to the costs for October is as follows:
| $ | ||
|---|---|---|
| Direct materials | 30,000 | |
| Direct labour | 15,000 | |
| Manufacturing overheads: | Fixed | 5,000 |
| Variable | 7,000 | |
| Selling and distribution costs | Fixed | 15,000 |
| Variable | 12,000 |
The fixed costs are factory specific and are not specially related to the output of whiteboards.
Planned output for October is 500 whiteboards.
Each whiteboard is sold for $300.
A foreign supplier has offered to supply Simeon Ltd with the whiteboards for $150.
(a) Produce financial data which assesses the case for discontinuing production and buying in the whiteboards from the foreign supplier.
(b) Outline three factors which would suggest that Simeon Ltd should continue to produce whiteboards regardless of any cost savings that could be made in the short-term.
Special order decisions
Question 7
Woolnough Ltd, as part of their product range, produces the 'SILVTO'. This product normally sells for $160. The following costs are associated with its production.
| Cost per unit | |
|---|---|
| $ | |
| Direct materials | 34 |
| Direct labour | 75 |
| Variable overheads | 12 |
| Apportioned fixed costs | 25 |
The directors have recently received a request from a Latvian company offering to purchase 2,000 SILVTOs at a price of $140 each. Advise them as to whether they should accept or reject the Latvian offer.
Question 8
Hadley Ltd manufactures steel tubes that are used in the construction of refrigerators. Each steel tube requires raw materials costing $12 and requires 3 hours of skilled labour at $8 per hour. Other variable costs per tube include administration $5 and power costs $6.
Monthly fixed overheads are: selling and distribution $8,000 and administration $3,000.
The list price charged by Hadley Ltd is $60.
Hadley Ltd has been approached by Kemp plc, specialists in fitted kitchens, with the following proposals.
- That Hadley Ltd produces an additional 2,000 tubes per month for Kemp plc but under the condition that the selling price is at a 20% discount on the list price.
- That the special order be increased to 3,000 tubes per month provided that the trade discount is increased to 30%.
Required
Produce a report to the directors of Hadley Ltd explaining why they should either accept or reject either of the proposals by Kemp plc.
