Question 1

Dino and Co, a firm of accountants, employs 6 qualified accounting staff at an annual salary cost of £53,625 each. Each accountant works 1,950 hours in a year. Of the 11,700 available hours in the year, 11,400 are spent on work that is chargeable to the clients. Dino and Co charges clients £50 for each hour that each accountant spends working on the clients' accounts, tax returns and on general business advice. The firm has fixed overhead costs of £202,500 per annum. What is Dino and Co's margin of safety in hours?

Accepted Answer

The answer of Dino and Co, a firm of accountants,...

Question 2

Rupinder sells crockery sets for £80 per set. Variable costs of production are £38 and the fixed costs per crockery set are £6 based on the expectation that the normal level of production and sales will be 34,000 crockery sets per annum. A sales commission of £2 is paid to the company's sales representatives for every crockery set sold. What is Rupinder's margin of safety?

Accepted Answer

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Question 3

The Lake View hotel has 60 rooms and is open for 360 days a year, giving a total number of room nights of 60 x 360 = 21,600. The charge for each room is £90 per night and the variable costs of each night's stay are £25 plus breakfast costing £10. Total fixed costs of the hotel are £715,000 per annum. The hotel has an occupancy rate of 80% each year. What is the margin of safety for the Lake View hotel in room nights?

Accepted Answer

The margin of safety is the difference between the actual number of room nights sold and the breakeven number of room nights. The breakeven number of room nights is calculated as follows:Breakeven number of room nights = Fixed costs / (Room rate - Variable costs)= 715,000 / (90 - 25 - 10)= 715,000 / 55= 13,000The actual number of room nights sold is 21,600. Therefore, the margin of safety is:Margin of safety = Actual number of room nights sold - Breakeven number of room nights= 21,600 - 13,000= 8,600

Question 4

The higher the margin of safety, the more likely it is that a business will make a loss.

Accepted Answer

A higher margin of safety indicates that a business can withstand a significant drop in sales before incurring a loss, making it less likely to make a loss.

Question 5

GF Limited makes and sells mini greenhouses for £80 each. The direct material component of each mini greenhouse costs £40, direct labour makes up £15 of the variable cost and variable overheads total up to £5. GF Limited has annual fixed costs of £54,000. A commission of £2 per mini greenhouse is paid to the sales representative for each sale achieved. GF Limited currently has sales of 5,000 mini greenhouses. Calculate the profit that GF Limited will make if 4,000 mini greenhouses are sold.

Accepted Answer

The selling price per mini greenhouse is £80. The total variable cost per unit is £40 (materials) + £15 (labour) + £5 (overheads) + £2 (commission) = £62. The contribution per unit is £80 - £62 = £18. For 4,000 units, the total contribution is 4,000 * £18 = £72,000. Subtracting the fixed costs of £54,000, the profit is £72,000 - £54,000 = £18,000.

Question 6

Podcaster University Press produces and sells a text book which provides comprehensive coverage of International Financial Reporting Standards. The book generates a contribution of £30 and each book is allocated a fixed overhead charge of £10 to give a profit of £20 on each book produced and sold. Fixed overheads for the book total up to £27,000 per annum. Podcaster University Press is experiencing a fall in demand for this book and expected sales have fallen from 2,700 to 1,200 books. Using sensitivity analysis, what is the profit or loss that Podcaster University Press will make from selling 1,200 copies of this book?

Accepted Answer

The answer of Podcaster University Press produces and sells a...

Question 7

Under sensitivity analysis, profit or loss = (unit sales - break-even point) x contribution per unit.

Accepted Answer

Sensitivity analysis involves assessing how different values of an independent variable affect a particular dependent variable under a given set of assumptions. In this context, profit or loss is calculated by multiplying the difference between unit sales and the break-even point by the contribution per unit.

Question 8

Sensitivity analysis uses contribution and break-even analysis to determine the profit or loss at any given level of sales. Which one of the following is the calculation used in sensitivity analysis?

Accepted Answer

Sensitivity analysis involves calculating the profit or loss at different levels of sales by considering the contribution per unit and the difference between actual sales and the break-even point. Option B correctly represents this calculation.

Question 9

JSP produces printers. The total variable production cost of each printer amounts to £35 and each printer sells for £60. In addition to the variable production cost, a royalty payment of £1 is paid to the special chip designer for each printer sold. JSP's fixed costs total up to £480,000 per annum. JSP currently sells 25,000 printers every year. A new managing director has been appointed and she has set a target profit of £216,000 for JSP in the coming financial year. How many printers will JSP have to sell in total to achieve a target profit of £216,000?

Accepted Answer

To achieve the target profit, calculate the contribution per printer: Selling price (£60) - Variable cost (£35) - Royalty (£1) = £24. Then, use the formula: (Fixed Costs + Target Profit) / Contribution per printer = (480,000 + 216,000) / 24 = 29,000 printers.

Question 10

Vijay produces shelving units. The total variable production cost of each shelving unit is £27 and each shelving unit sells for £55. In addition to the variable production cost of each unit, a sales commission of £3 is paid to the sales staff for each shelving unit sold. Vijay allocates a fixed overhead of £10 to each shelving unit on the basis that normal annual production and sales of 21,000 shelving units are achieved. Vijay is looking to achieve a target profit of £360,000 for the next financial year. How many shelving units will Vijay need to sell in total to achieve a target profit of £360,000?

Accepted Answer

To find the number of units needed to achieve the target profit, calculate the contribution margin per unit: Selling price (£55) - Variable cost (£27) - Sales commission (£3) = £25. Then, use the formula: (Fixed costs + Target profit) / Contribution margin per unit = (21,000 units * £10 + £360,000) / £25 = 22,800 units.

Question 11

Target profit uses contribution analysis to determine the level of sales required to achieve a certain level of profit. Which one of the following is the correct method to use to calculate target profit?

Accepted Answer

The answer of Target profit uses contribution analysis to determine...

Question 12

Which of the following is not a potential problem to take into account when making decisions to outsource production of goods or services?

Accepted Answer

Outsourcing typically does not lead to improved morale and commitment from the remaining workforce; it can often lead to uncertainty and decreased morale.

Question 13

Outsourcing = loss of control.

Accepted Answer

Outsourcing can lead to a loss of control because the company relies on an external provider to manage certain tasks or services, which may result in less direct oversight and influence over those operations.

Question 14

David Limited can sell as much production as it can make of each of its products. The company is currently facing a shortage of input materials for its products and has to decide which product to produce in the next three months in order to maximize its profits. Each kilogram of input material used in all four products costs £5. The company produces four products, A, B, C and
$\begin{array}{|c|c|c|c|}
\hline \text { Product } & \begin{array}{c}
\text { Selling price } \
\text { per unit of } \
\text { production }
\end{array} & \begin{array}{c}
\text { Kilograms of } \
\text { material used } \
\text { in one unit of } \
\text { production }
\end{array} & \begin{array}{c}
\text { Other variable } \
\text { costs per unit } \
\text { of production }
\end{array} \
\hline \text { A } & £ & \text { Kgs } & £ \
\hline \text { B } & 50 & 2 & 20 \
\hline \text { C } & 60 & 4 & 30 \
\hline \text { D } & 60 & 3 & 21 \
\hline
\end{array}$
Which product should David Limited produce and sell in order to maximise profits over the next three months?

Accepted Answer

The answer of David Limited can sell as much production...

Question 15

Alex Limited manufactures 3 products, A, B and C. Product A generates a contribution of £20, product B a contribution of £30 and product C a contribution of £40. The company is currently anticipating a shortage of the necessary grade of skilled labour over the next month with the supply of this labour limited to a maximum of 4,000 hours. Product A uses 2 hours of this skilled labour per unit of production, product B uses 4 hours and product C uses 5 hours. The demand for the next month for each product is as follows: Product A: 500 units
Product B: 600 units
Product C: 700 units
What is the profit maximizing production schedule that Alex Limited should follow for the next month?

Accepted Answer

The profit-maximizing production schedule should prioritize products with the highest contribution per hour of skilled labor. Product C has the highest contribution per hour (£40/5 = £8), followed by Product A (£20/2 = £10), and then Product B (£30/4 = £7.5). Therefore, the company should produce the maximum demand for Product A and C, using up the available labor hours efficiently.

Question 16

for the fowllowing question
A. Calculate the contribution maximising production schedule.
B. Calculate the quantity of limiting factor used in the production of each product.
C. Calculate the contribution per unit of limiting factor delivered by each product.
The three stages in limiting factor analysis are listed above. However, they are not currently listed in the correct order. What is the correct order which these stages should follow?

Accepted Answer

First, calculate the quantity of the limiting factor used in the production of each product (b), then calculate the contribution per unit of the limiting factor delivered by each product (c), and finally, calculate the contribution-maximizing production schedule (a).

Question 17

Which one of the following statements is not an assumption of relevant cost and contribution analysis?

Accepted Answer

Relevant cost and contribution analysis typically assumes that variable costs vary directly with production, meaning they are linear, not curvilinear.

Question 18

In which one of the following situations can relevant cost and contribution analysis not be used?

Accepted Answer

Break-even analysis involving two or more products is not a situation where relevant cost and contribution analysis can be used. This is because relevant cost and contribution analysis is used to compare different alternatives, and in the case of break-even analysis involving two or more products, there is only one alternative: to produce and sell the products.

Question 19

Variable costs are assumed to be linear, that is, variable costs vary directly in line with production of goods and delivery of services. Which of the following would result in costs not behaving in a strictly linear fashion?
Please select all that apply.

Accepted Answer

Bulk discounts can cause variable costs to decrease per unit as volume increases, bonus payments may not increase linearly with production, and overtime payments can increase the cost per unit after a certain production level.

Question 20

Break-even analysis is just as valid for two or more products as it is for one product.

Accepted Answer

The answer of Break-even analysis is just as valid for...

Quiz 9: Relevant Costs, Marginal Costing and Decision Making