N1510 Seminar One Questions

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N1510 Seminar One Questions

Question 1: Relevant costs and decision-making

AutoGil Ltd manufactures automotive components. Tee Cars plc, a car manufacturer has offered a contract to AutoGil Ltd for the supply of 250 identical automotive components over the next 12 months.

The data relating to the production of each component is as follows:

(i) Material requirements:

3kg material C1

4kg material M2

1 Part No. 42001

Note:

Material C1 is in continuous use by the company.  4000kg are currently held in stock at a book value of £90.80 per kg but it is known that future purchases will cost £100.80 per kg.

2000kg of material M2 are currently held in stock.  The original cost of the material was £90.60 per kg but as the material has not been required for the last three years it has been written down to £45.00 per kg scrap value.  A foreseeable alternative use is as a substitute for material M5 (which is still in regular use by the company), however, further processing costs of £18.80 per kg is needed to convert material M2 as a substitute for M5. The current cost of material M5 is £85 per kg.

It is estimated that the Part No. 42001 could be bought for £150 each.

(ii) Labour requirements: Each component would require three hours of skilled labour and six hours of semi-skilled labour.  A skilled employee is available and is currently paid £16 per hour.  A replacement would be obtained at a rate of £13 per hour for the work which would otherwise be done by the skilled employee.  The current rate for semi-skilled work is £10 per hour and an additional employee can be appointed for this work.

(iii) Overheads: AutoGil Ltd absorbs overhead by a machine hour rate. The overhead rate per machine hour is currently £20 of which £6 is variable overhead and £14 is fixed overhead.  Fixed costs are estimated to increase by £15,000 if the contract is undertaken.  Spare machine capacity is available and each component would require five machine hours.

A price of £850 per component has been suggested by Tee Cars plc.

Requirements:

(a) Should the contract be accepted? Show all workings and state any assumptions made.

(b) Briefly discuss three factors that the management of AutoGil Ltd should consider and which may influence their decision.

Question 2: CVP analysis

A company manufactures a single product. Budget and standard cost details for next year include: Selling price per unit $24.00

Variable production cost per unit $8.60

Fixed production costs $650,000

Fixed selling and distribution costs $230,400

Sales commission 5% of selling price

Sales 90,000 units

Required:

(i) Calculate the break-even point in units and sales revenue.

(ii) Calculate the percentage by which the budgeted sales can fall before the company begins to make a loss (margin of safety).

The marketing manager has suggested that the selling price per unit can be increased to $25.00 if the sales commission is increased to 8% of selling price and a further $10,000 is spent on advertising.

(iii) Calculate the revised break-even point based on the marketing manager’s suggestion.

(CIMA P1 Performance Operations)