Question 1

Additup Ltd manufactures and markets pocket calculators which sell at £22 each. Current output is 40000 units per month, which represent 90% of the plants capacity. A new chain-store offers to buy up to 5000 calculators as a special order at £18 per unit and requires these immediately. These would sell under their own brand name. Total costs per month are £800000 of which £192000 are fixed costs. Assuming that the company maximises profits what is the profit made:
A) £272 532
B) £312000
C) £242 458
D) £204 432

Accepted Answer

D

Question 2

What is the optimal production programme in kgs?
A) X = 1000, Y = Nil
B) X = 300, Y = 3700
C) X = 500, Y = 3500
D) X = 400, Y = 3600

Accepted Answer

The optimal production programme is where Marginal Cost (MC) is equal to Marginal Revenue (MR). From the given data, the MC values for X and Y are 3 and 1 respectively. The MR values are given by the demand curves, which are MRx = 50 - X and MRy = 70 - 0.02Y. Equating the MC and MR values and solving the equations will give us the optimal production programme in terms of X and Y. The solution is X = 500 and Y = 3500. Therefore, the best choice is C.

Question 3

Product X - Contribution £40 and uses 20 scarce machine hours. Component Y - used in manufacture of X, has a variable cost of £5 and uses 3 machine hours. Component y can be bought for £10. In determining whether to make or buy what is the relevant cost of making:
A) £10
B) £6
C) £11
D) £40

Accepted Answer

The relevant cost of making includes the variable cost of £5 and the opportunity cost of using the machine hours. Since the product X generates a contribution of £40 using 20 hours, each hour contributes £2 (£40/20 hours). Component Y uses 3 hours, so the opportunity cost is £6 (3 hours * £2/hour). Therefore, the total relevant cost of making is £11 (£5 variable cost + £6 opportunity cost).

Question 4

The analysis of constraints and decision making is only appropriate to manufacturing not service industries.

Accepted Answer

The analysis of constraints and decision making is not limited to manufacturing industries only. It can also be applicable to service industries. For example, service industries such as healthcare, banking, and transportation also face constraints and require decision making to improve their operations and services.

Question 5

It is necessary to establish the contribution per unit of constraint in determining the optimal output level when there is a constraint.

Accepted Answer

In order to determine the optimal output level when there is a constraint, it is important to calculate the contribution margin per unit of the constraint. This allows managers to make informed decisions about how to allocate limited resources and maximize profits.

Question 6

A firm at present manufacturers all the components that go to make up its finished products. A salesman from a component supplier has just offered to provide the firm’s requirements for two components, the JC 100 at £7.75 each and the JC 200 at £2 each. If the firm buys in the components the capacity utilised at present would be unused. The firm currently manufactures 50 000 units of each component and the current costs of production are as follows:

What is the extra cost (EC) or saving (S) per unit if the company decides to buy in the component:

JC 100 (£)  $  \quad $        JC 200 (£)
A) 2.25 (EC)  $  \quad $0.25 (S)
B) 1.25 (S)  $  \quad $2.00 (EC)
C) 1.75 (EC)  $  \quad $1.25 (S)
D) 2.00 (S)  $  \quad $1.00 (S)

Accepted Answer

The answer of A firm at present manufacturers all the...

Question 7

For decisions where there are constraints the objective is to establish a optimum output within the constraint which will maximise contribution.

Accepted Answer

When there are constraints, the goal of decision making is typically to maximize contribution within those constraints, rather than achieving an unconstrained optimum. This is because the constraints limit the available options and may prevent the attainment of an unconstrained optimum.

Question 8

A firm manufacturers two products both of which require the same material. For the coming month the supply of material is limited to 2,600kgs. Details of each product are as follows:

The production plan that will maximum profit is
A) 50 units of S and 400 of T
B) 292 units of S and 237 of T
C) 326 units of S and 216 of T
D) 500 units of S and 100 of T

Accepted Answer

The answer of A firm manufacturers two products both of...

Question 9

Differential costs are the differences between fixed and variable costs.

Accepted Answer

Differential costs are the differences between the costs of two alternative courses of action, not between fixed and variable costs.

Question 10

A make or buy decision involves the problem of a business choosing between making a product or carrying out a service using its own resources, and paying another external organisation to make or carry out a service for them.

Accepted Answer

A make or buy decision involves choosing between producing a product or service in-house or purchasing it from an external supplier.

Question 11

All fixed costs are unavoidable.

Accepted Answer

Fixed costs can be both avoidable and unavoidable. Avoidable fixed costs are those that can be eliminated if a particular activity or segment is discontinued, while unavoidable fixed costs are those that the business must pay regardless of its level of activity.

Question 12

Ben Plc makes a range of clutches for which the cost cards show the following:

For the coming month material suppliers will be limited to £50 000.
The optimum production plan is:
A) W X Y Z 5000 1666
B) W X Y Z 3285 3000
C) W X Y Z 3000 1000 733
D) W X Y Z 2555 1000 1000

Accepted Answer

Option C uses the least amount of money for material suppliers, which meets the £50,000 limit while still producing a significant amount of each type of clutch. Option A uses too much material, and option B does not produce enough of clutch types W and Y, leading to potential production and sales issues. Option D produces too little of clutch type X, which may lead to inventory or market demand issues. Therefore, option C is the best choice.

Question 13

Were there are resource constraints this will not affect accept or reject decisions

Accepted Answer

Resource constraints can affect accept or reject decisions because they limit the capacity to undertake new projects or orders, potentially leading to the rejection of opportunities that cannot be accommodated within the available resources.

Question 14

To determine the optimum output with one resource constraint the criteria should be
A) The highest contribution per product
B) The contribution per unit of constraint for each product
C) The highest profit per product
D) The lowest cost per product

Accepted Answer

When there is a constraint on resources, it is important to make the most efficient use of that resource to maximize profits. The contribution per unit of constraint for each product helps to determine which products provide the highest return on investment for the limited resource. Therefore, B is the best choice. A is not the best choice because it only focuses on overall contribution without taking into account the resource constraint. C and D are also not the best choices because they do not consider the resource constraint at all.

Question 15

The make or buy decision is probably the most common type of mutually exclusive decision that confronts organisations.

Accepted Answer

The make or buy decision is a common type of mutually exclusive decision for organisations, as it involves deciding whether to produce a product or service in-house or to outsource it from external suppliers or partners.

Question 16

Hobson Limited produces two products, the X and Y, which both use the same grade of specialist labour. Only 3800 specialist labour hours are estimated to be available for the 20X1 financial year because of skills shortages in the economy as a whole.
Ideally the directors would like to sell 500 units of X and 500 units of Y but they recognize the actual amount that can be produced and sold is likely to be limited by the labour shortage.
The following information is available about the products:

What is the optimal production plan for 20X1 (to the nearest whole unit)?
A) 400 units of X and 200 Y
B) 171 units of X and 400 units of Y
C) 300 units of X and 400 units of Y
D) 400 units of X and 144 units of Y

Accepted Answer

The answer of Hobson Limited produces two products, the X...

Question 17

When there are no resource constraints all opportunities should be accepted if they make a profit.

Accepted Answer

Even without resource constraints, not all profitable opportunities should be accepted due to factors such as strategic fit, potential risks, and long-term implications that might not align with the company's goals or could potentially harm its reputation or financial health in the future.

Question 18

The cash cost of employing labour, for example, is the internal opportunity cost.

Accepted Answer

The cash cost of employing labor is an explicit cost, representing actual cash outflows, not the internal opportunity cost, which refers to the value of the best alternative use of resources.

Question 19

Constraints are often restrict the amount of productive capacity available to a business, or the potential market for a product, or the availability of particular types of material or labour. In management accounting, such constraints are commonly referred to as:
A) Limiting factors
B) Limiting supply
C) restricting factors
D) Shortages

Accepted Answer

In management accounting, constraints that restrict productive capacity, market potential or availability of resources are called limiting factors. It is the factors that limit the ability of a business to generate revenue, profit or growth. These constraints can be temporary or long-term and may require the business to make strategic decisions in order to overcome them. Therefore, the best choice is A) Limiting factors.

Question 20

Invariably, the opportunity cost of a resource that is scarce will be greater than its purchase price.

Accepted Answer

Opportunity cost refers to the cost of the next best alternative forgone when a decision is made. When a resource is scarce, there are limited alternatives to choose from and the opportunity cost of using that resource for a particular purpose will be high. This is because the resource could have been used for something else that may have yielded a higher return. Therefore, the opportunity cost of a scarce resource is usually higher than its purchase price.

Quiz 18: Accounting for Decision-Making: Resource Constraints and Decisions Which Are Mutually Exclusive

What is the optimal production programme in kgs?

Product X - Contribution £40 and uses 20 scarce machine hours. Component Y - used in manufacture of X, has a variable cost of £5 and uses 3 machine hours. Component y can be bought for £10. In determining whether to make or buy what is the relevant cost of making: