Please complete all two questions. Question 1
Patel Ltd is a small start-up family-owned business that manufactures and sells a single
product to customers in UK. The company has recently been approached by a UK university for an order of 75,000 office sets (easy desk & chair) for the opening of four new campuses, which is expected to be their total sales for the year. The CEO is currently reviewing the following information for this order:
|Cost per unit||£|
|Direct materials per chair||13|
|Direct labour per chair||9|
|Variable selling & distribution cost||5|
|Other variable production overhead||3|
|Total fixed cost||360,000|
The CEO is evaluating the possibility of pricing £36 per office set.
As a team member of accounting department, you are required to provide the following information to the CEO:
£36 per unit. Draw the break-even chart that shows break-even point and margin of safety.
The CEO has noticed the following details on the actual total fixed costs for the year ended 30 June 2019 and is keen to know the impact on profit if product is valued at either marginal cost or full cost (absorption cost):
|Factory Power Consumption||40,000|
|Depreciation of factory equipment||28,000|
|Fixed selling & distribution cost||20,000|
The budgeted and actual production units for the year are as follow, with no opening inventory:
The senior management team is considering adopting a cost-plus pricing approach to improve Patel’s financial performance, which is to calculate the price based on cost plus a mark-up of 30%. Yet the management team is uncertain whether price should be based on full cost or marginal cost. Your line manager asked you to:
SunPower Ltd manufactures, sells, and installs solar panels that are sold to domestic customers. The industry is highly competitive, and the management team reviews the company’s performance on a monthly basis. The trainee Management Accountant has therefore produced a comparison of budgeted and actual performance for April and this is shown below:
Comparison of budgeted and actual performance for April
|Sales volume (units)||1,300||1,180|
|Selling & installation costs||109,750||95,280|
Production overheads and administration costs are believed to be fixed, whereas selling and installation costs are semi-variable. The selling and installation cost budget was set by taking appropriate information from the results for the last three months of 2019, which are shown below:
Selling and installation costs
|Sales (units)||Total cost (£)|
The Finance Director is concerned that the selling and installation costs budget may have been padded, but the Installation Manager complained that the budget includes costs that she does not control.
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