ased mediate: Decision on whether to launch a nev on the Flxed costs are EPO0O p
ID: 2329049 • Letter: A
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ased mediate: Decision on whether to launch a nev on the Flxed costs are EPO0O per week uct. A compary is currently manufacturing at on of fuil practical capacity in each of its two prodi 180 There is a maximum of 2000 machine hours availa cetnts, due to a reduction in market share to launch a new product which, it is hoped, will recover (a) Determine the production plan which d direct costs of the new product, Product X, are weekfly profit of PDR ple and prepare a showing the profit your plan will yeid The marketing, director of POR ple is cone ished from the following information: to be pirect ma o the product will require 30 kilos net of Material A. customers. 10 per cent of materials input are to be expected count o st s £5.40 per kilo before discount. A quantity r cent is given on all purchases if the monthly )To increase the number of hours worke machinery by working, overtime. Such c paid at a premium of 50 per cent abou rates, and variable overhead costs wo increase in proportion to labour costs tn) To buy product B from an overseas su per unit including carriage. This would aged at a cost of E1 per unit before t uantity exceeds 25000 kilos. Other materials are abour (per 100 units): Department 1: 40 hours at £12.00 per hour btained for e price quoted Department 2: 15 hours at £13.00 per hour. e overhead absorption rates are established for each ction department. Department 1 overheads are absorbed produ at 130 per Evaluate each of the two strate management accountant, prepare a repon director, stating your reasons (quantitative cent of direct wages, which is based on the expected a value of not been used overhead costs and usage of capacity if Product X is launcmanagement accltemative strate e in Department 2 is to be established as a rate per which, if either, should be adopted. direct labour hour also based on expected usage of capacity. The following annual figures for Department 2 are based on ful practical capacity: CIMA Stage 2 is £2500 y alternative IM9.6 Intermediate: Allocation of scare buy decision where scarce capacity e engineering company engaged in the m £5 424000 2 200000 Direct labour hours Variable overheads in Department 1 are assessed at 40 per would have to ghty per cent remainder es, 50 per cent cent of direct wages and in Department 2 are £1980000 (at full components and finished products more types of machine in its machini costs and revenues (where appropri component or unit of the finished pr practical capacity). Non-production overheads are estimated as follows (per unit of Product X): for hourly ekends, Fixed The selling price for Product X is expected to be £16 per unit, with annual sales of 2400000 units. ormal ur. at present Direct materials 8 and 10 ire (a) Determine the estimated cost per unit of Product X. (b) Comment on the viability of Product X. o unskilled (13 marks) overhead: the employees ff (for which for Product X could be £15.50 per unit, at which price annual sales would be expected to be 2900000 units. Determine, and comment briefly on, the optimum seing (c) Market research indicates that an alternative selling price Fixed overhead: ked. 12 the erating 54 press rinting hour. This ACCA Cost and Management Accounting 1 r is unlimited reExplanation / Answer
Raw material:
Quantity of raw material required in kilos = (30 kilos/ 100 units) x 2400000 units = 720000 kilos
Montlhy requirement of raw materials in kilos = 720000/ 12 = 60000 kilos
Since monthly requirement is greater than 25000 kilos the purchase rate of raw material will be at a discounted price of 5% i.e £5.40 x 0.95 = £5.13
Raw material cost = 720000 kilos x £5.13 = £3693600
Other material cost = £1.34 x 2400000 units = £3216000
Total raw material cost = £6909600
Direct labour:
Department 1: (40 hours/ 100 units x 2400000 units) x £12.00 per hour = £11520000
Department 2: (15 hours/ 100 units x 2400000 units) x £13.00 per hour = £4680000
Total direct labor cost = £16200000
Fixed overheads:
Department 1 = 130% x 11520000 = £14976000
Department 2 = £5424000/ 2200000 x 360000 = £887564
Total fixed overheads = £15863564
Variable overheads:
Department 1 = 40% x 11520000 = £4608000
Department 2 = £1980000/ 2200000 x 360000 = £324000
Total variable overheads = £4932000
Non-production overheads:
Total non production overheads = (£0.70 + £1.95) x 2400000 = £6360000
a. Total cost of product X = £6909600 + 16200000 + 15863564 + 4932000 + 6360000
= £50265164
Estimated cost per unit = £50265164/ 2400000
= £20.94
b. Since the cost per unit of Product X of £20.94 is much greater than the selling price of £16 per unit, the product is not viable.
c. The optimum selling price does not factor/ consider the fixed overheads and fixed portion of non production overheads as part of product cost.
Working for optimum selling price:
Raw material:
Quantity of raw material required in kilos = (30 kilos/ 100 units) x 2900000 units = 870000 kilos
Montlhy requirement of raw materials in kilos = 720000/ 12 = 72500 kilos
Since monthly requirement is greater than 25000 kilos the purchase rate of raw material will be at a discounted price of 5% i.e £5.40 x 0.95 = £5.13
Raw material cost = 870000 kilos x £5.13 = £4463100
Other material cost = £1.34 x 2900000 units = £3886000
Total raw material cost = £8349100
Direct labour:
Department 1: (40 hours/ 100 units x 2900000 units) x £12.00 per hour = £13920000
Department 2: (15 hours/ 100 units x 2900000 units) x £13.00 per hour = £5655000
Total direct labor cost = £19575000
Variable overheads:
Department 1 = 40% x 13920000 = £5568000
Department 2 = £1980000/ 2200000 x 435000 = £391500
Total variable overheads = £5959500
Non-production overheads:
Total non production overheads = £0.70 x 2900000 = £2030000
Total cost of product X = £8349100 + 19575000 + 5959500 + 2030000 = £35913600
Estimated unit cost = £35913600/ 2900000 = £12.38
Now, since the relevant cost per unit of £12.38 is lower than selling price of £15.50, the selling price of £15.50 is optimum since it will increase the sales and the profit margin.
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