Question Tag: Variable Costs

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  • 15 Marks

May 2023 – L2 – SA – Q7 – Pricing Decisions

Calculation of minimum price Kola Plc should quote for 400 units of special security padlock keys using learning curve principles.

Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:

Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.

Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.

Required:

Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)

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  • 15 Marks

PM – May 2023 – L2 – SA – Q6 – Cost Management Strategies

Evaluate the financial impact of hiring equipment and assess sensitivity to changing demand.

TK is a theme park. The following information is available for the forthcoming month:

Forecast daily ticket sales and prices:

Ticket Price per ticket Forecast Sales
Pre-booked discounted ticket N580 1,500
Standard ticket N780 8,000
Premium family ticket (admits 4) N3,700 675

The theme park will be open for 30 days in the month.

Costs:

  • Variable costs per person per day are forecast to be N2050.
  • Fixed costs for the month are forecast to be N130,000,000.

Pricing Information:

  • The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will be sold.
  • A premium family ticket admits four people to the theme park and allows them to go to the front of the queues in the theme park. The price of a premium family ticket has been set at N3,700 to maximize profit.

Market information shows that for every N100 increase in the selling price of a premium family ticket, the demand would reduce by 25 tickets. For every N100 decrease in the selling price, the demand would increase by 25 tickets.

The theme park has adequate capacity to accommodate any level of demand for premium family tickets. It is assumed that four people would always be admitted on every premium family ticket sold. Sales of the different ticket types are independent of each other.

Equipment Hire:

TK is considering hiring some automated ticket reading equipment for the forthcoming month. The hire of this equipment would increase fixed costs by N5,000,000 for the month. However, variable costs per person would be reduced by 8% during the period of the hire.

Required:

a) Calculate the financial benefit of hiring the equipment for the forthcoming month given its impact on variable cost and the price charged for premium family tickets. (11 Marks)

b) It has now been realized that a competing theme park is planning to offer discounted ticket prices during the forthcoming months. It is thought that this will reduce the demand for TK’s standard tickets. TK will not be able to reduce the price of the standard tickets for the forthcoming month.

Discuss the sensitivity of the decision to hire the equipment to a change in the number of standard tickets sold per day. (Note: Your answer should include the calculation of the sensitivity.) (4 Marks)

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  • 20 Marks

PM – Nov 2021 – L2 – Q2 – Decision-Making Techniques

Determine whether to outsource production, calculate indifference price, and evaluate non-financial factors for internal production.

Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:

Cost Components Amount (₦)
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
Total 122,000

Additional information:

  1. The machine used exclusively for “Part 2011” was acquired last year for ₦120,000 and has a useful life of six years with no residual value.
  2. The machine could be sold today for ₦30,000.
  3. Product and process engineering costs will cease after one year if outsourced.
  4. Rent savings from storage use if “Part-2011” production stops is ₦2,000.
  5. General overheads are fixed and not allocated to “Part-2011” if outsourced.
  6. Assume a required rate of return of 12%.

Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q5 – Costing Methods

Identify an incorrect statement about marginal costing in process costing.

When marginal costing is used in process costing, which of the following is NOT correct?

A. Process accounts will contain variable costs only

B. Equivalent units are valued at variable cost

C. Transfer from one process to another will be at total costs of the process

D. Losses, abnormal and normal will be valued at variable cost only

E. All fixed costs will be written off, each period, to costing profit or loss

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q2 – Cost-Volume-Profit (CVP) Analysis, Break-Even Point

Calculate the total fixed costs using the break-even point and contribution margin.

Given breakeven point of 6,000 units, unit selling price of N90, and unit variable cost of N40, the total fixed cost is:

A. N240,000

B. N300,000

C. N360,000

D. N540,000

E. N600,000

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  • 1 Marks

MI – Nov 2015 – L1 – SA – Q7 – Costing Techniques

Uses the high-low method to calculate fixed and variable cost elements from activity data.

Use the high-low method to calculate the Fixed Cost (FC) and Variable Cost (VC) elements of the

A. VC = N0.08/unit, FC = N1,120/unit
B. VC = N0.88/unit, FC = N1,020/unit
C. VC = N0.80/unit, FC = N1,220/unit
D. VC = N0.82/unit, FC = N1,320/unit
E. VC = N0.85/unit, FC = N1,330/unit

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  • 1 Marks

MI – May 2018 – L1 – SA – Q3 – Cost Classifications

Examining the relationship between direct and variable costs.

Which of the following statements is NOT correct in the relationship between direct and variable costs?
A. Direct costs and variable costs are one and the same
B. Direct costs can be directly traced to a product while variable costs vary with the level of production output
C. Direct costs are traceable to cost objects, e.g. goods or services, departments or projects while all variable costs are not necessarily traceable
D. Direct costs may include fixed and variable costs
E. Both direct costs and variable costs are traceable to production

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

This question involves break-even point, target profit, and the effect of cost changes on break-even.

A company that operates below break-even point year-after-year needs to be restructured.

a. What is break-even point? (2 Marks)

b. Elebu Nig. Plc. manufactures four products at its GBOOPA Plant in Olorungbebe Industrial Estate.

The company sold 450,000 units of its product at N60 per unit. Variable costs are N45 per unit, while the fixed cost incurred evenly throughout the year amounted to N2,916,000, which comprises of manufacturing costs of N1,800,000 and selling costs of N1,116,000.

You are required to calculate:
i. The break-even point in units and in value (5 Marks)
ii. The number of units that must be sold to earn an income of N225,000 before income tax (3 Marks)
iii. The number of units that must be sold to generate after-tax profit of N300,000 if the income tax rate is 40% (5 Marks)
iv. The number of units required to break-even if the fixed cost increases by 2.5% and variable cost increases by 5% (5 Marks)

 

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q19 – Cost-Volume-Profit (CVP) Analysis

This question focuses on identifying the cost pattern that includes both fixed and variable components.

The cost behavioral pattern which shows element of fixed and variable components is:
A. Variable cost
B. Standard cost
C. Full cost
D. Semi-variable cost
E. Fixed cost

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  • 1 Marks

MI – Nov 2022 – L1 – SA – Q8 – Costing Methods

Calculation of unit cost when production increases by 25%

The cost per unit of a product manufactured in a factory amounts to ₦160 (75% variable) when production is 10,000 units. When production increases by 25%, the unit cost of production will be:
A. ₦145
B. ₦150
C. ₦152
D. ₦140
E. ₦120

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  • 15 Marks

May 2023 – L2 – SA – Q7 – Pricing Decisions

Calculation of minimum price Kola Plc should quote for 400 units of special security padlock keys using learning curve principles.

Kola Plc produces and sells a brand of security padlock keys. Its budget for next year is as follows:

Further research showed that the time taken for the first 50 units was 1,800 hours and the first 100 units took 3,000 hours. The customer is insistent that Kola Plc at least quotes a price for his requirement of 400 units.

Kola Plc is reluctant because the order would divert labour away from the regular padlock keys, and they cannot recruit more staff. If the contract is taken on, the same material would be used, with fixed production overheads of N150,000 and N30,000 administration costs.

Required:

Calculate the minimum price Kola Plc should quote for the 400 units of the special padlock keys.
(Total 15 Marks)

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  • 15 Marks

PM – May 2023 – L2 – SA – Q6 – Cost Management Strategies

Evaluate the financial impact of hiring equipment and assess sensitivity to changing demand.

TK is a theme park. The following information is available for the forthcoming month:

Forecast daily ticket sales and prices:

Ticket Price per ticket Forecast Sales
Pre-booked discounted ticket N580 1,500
Standard ticket N780 8,000
Premium family ticket (admits 4) N3,700 675

The theme park will be open for 30 days in the month.

Costs:

  • Variable costs per person per day are forecast to be N2050.
  • Fixed costs for the month are forecast to be N130,000,000.

Pricing Information:

  • The sales of pre-booked discounted tickets and standard tickets will be restricted to 1,500 and 8,000 per day respectively for the forthcoming month. It is forecast that all of these tickets will be sold.
  • A premium family ticket admits four people to the theme park and allows them to go to the front of the queues in the theme park. The price of a premium family ticket has been set at N3,700 to maximize profit.

Market information shows that for every N100 increase in the selling price of a premium family ticket, the demand would reduce by 25 tickets. For every N100 decrease in the selling price, the demand would increase by 25 tickets.

The theme park has adequate capacity to accommodate any level of demand for premium family tickets. It is assumed that four people would always be admitted on every premium family ticket sold. Sales of the different ticket types are independent of each other.

Equipment Hire:

TK is considering hiring some automated ticket reading equipment for the forthcoming month. The hire of this equipment would increase fixed costs by N5,000,000 for the month. However, variable costs per person would be reduced by 8% during the period of the hire.

Required:

a) Calculate the financial benefit of hiring the equipment for the forthcoming month given its impact on variable cost and the price charged for premium family tickets. (11 Marks)

b) It has now been realized that a competing theme park is planning to offer discounted ticket prices during the forthcoming months. It is thought that this will reduce the demand for TK’s standard tickets. TK will not be able to reduce the price of the standard tickets for the forthcoming month.

Discuss the sensitivity of the decision to hire the equipment to a change in the number of standard tickets sold per day. (Note: Your answer should include the calculation of the sensitivity.) (4 Marks)

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  • 20 Marks

PM – Nov 2021 – L2 – Q2 – Decision-Making Techniques

Determine whether to outsource production, calculate indifference price, and evaluate non-financial factors for internal production.

Divine Grace (DG) Limited currently produces “Part-2011” internally but has received an offer from KK Plc to outsource the production. The offer is for 1,000 units at N100 per unit for the next five years. The cost accountant provides the following cost breakdown for internal production of 1,000 units:

Cost Components Amount (₦)
Direct materials 44,000
Direct production labour 22,000
Variable production overhead 14,000
Depreciation on machine 20,000
Product and process engineering 8,000
Rent 4,000
General overheads 10,000
Total 122,000

Additional information:

  1. The machine used exclusively for “Part 2011” was acquired last year for ₦120,000 and has a useful life of six years with no residual value.
  2. The machine could be sold today for ₦30,000.
  3. Product and process engineering costs will cease after one year if outsourced.
  4. Rent savings from storage use if “Part-2011” production stops is ₦2,000.
  5. General overheads are fixed and not allocated to “Part-2011” if outsourced.
  6. Assume a required rate of return of 12%.

Required:
a. Should DG Limited outsource “Part 2011”? (10 Marks)
b. What maximum price should KK Plc quote for 1,000 units to make DG indifferent between outsourcing and internal production? (5 Marks)
c. What non-financial factors would favor internal production over outsourcing? (5 Marks)

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q5 – Costing Methods

Identify an incorrect statement about marginal costing in process costing.

When marginal costing is used in process costing, which of the following is NOT correct?

A. Process accounts will contain variable costs only

B. Equivalent units are valued at variable cost

C. Transfer from one process to another will be at total costs of the process

D. Losses, abnormal and normal will be valued at variable cost only

E. All fixed costs will be written off, each period, to costing profit or loss

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  • 1 Marks

MI – Nov 2020 – L1 – SA – Q2 – Cost-Volume-Profit (CVP) Analysis, Break-Even Point

Calculate the total fixed costs using the break-even point and contribution margin.

Given breakeven point of 6,000 units, unit selling price of N90, and unit variable cost of N40, the total fixed cost is:

A. N240,000

B. N300,000

C. N360,000

D. N540,000

E. N600,000

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  • 1 Marks

MI – Nov 2015 – L1 – SA – Q7 – Costing Techniques

Uses the high-low method to calculate fixed and variable cost elements from activity data.

Use the high-low method to calculate the Fixed Cost (FC) and Variable Cost (VC) elements of the

A. VC = N0.08/unit, FC = N1,120/unit
B. VC = N0.88/unit, FC = N1,020/unit
C. VC = N0.80/unit, FC = N1,220/unit
D. VC = N0.82/unit, FC = N1,320/unit
E. VC = N0.85/unit, FC = N1,330/unit

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  • 1 Marks

MI – May 2018 – L1 – SA – Q3 – Cost Classifications

Examining the relationship between direct and variable costs.

Which of the following statements is NOT correct in the relationship between direct and variable costs?
A. Direct costs and variable costs are one and the same
B. Direct costs can be directly traced to a product while variable costs vary with the level of production output
C. Direct costs are traceable to cost objects, e.g. goods or services, departments or projects while all variable costs are not necessarily traceable
D. Direct costs may include fixed and variable costs
E. Both direct costs and variable costs are traceable to production

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  • 20 Marks

MI – Nov 2014 – L1 – SB – Q3 – Cost-Volume-Profit (CVP) Analysis

This question involves break-even point, target profit, and the effect of cost changes on break-even.

A company that operates below break-even point year-after-year needs to be restructured.

a. What is break-even point? (2 Marks)

b. Elebu Nig. Plc. manufactures four products at its GBOOPA Plant in Olorungbebe Industrial Estate.

The company sold 450,000 units of its product at N60 per unit. Variable costs are N45 per unit, while the fixed cost incurred evenly throughout the year amounted to N2,916,000, which comprises of manufacturing costs of N1,800,000 and selling costs of N1,116,000.

You are required to calculate:
i. The break-even point in units and in value (5 Marks)
ii. The number of units that must be sold to earn an income of N225,000 before income tax (3 Marks)
iii. The number of units that must be sold to generate after-tax profit of N300,000 if the income tax rate is 40% (5 Marks)
iv. The number of units required to break-even if the fixed cost increases by 2.5% and variable cost increases by 5% (5 Marks)

 

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  • 1 Marks

MI – Nov 2014 – L1 – SA – Q19 – Cost-Volume-Profit (CVP) Analysis

This question focuses on identifying the cost pattern that includes both fixed and variable components.

The cost behavioral pattern which shows element of fixed and variable components is:
A. Variable cost
B. Standard cost
C. Full cost
D. Semi-variable cost
E. Fixed cost

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  • 1 Marks

MI – Nov 2022 – L1 – SA – Q8 – Costing Methods

Calculation of unit cost when production increases by 25%

The cost per unit of a product manufactured in a factory amounts to ₦160 (75% variable) when production is 10,000 units. When production increases by 25%, the unit cost of production will be:
A. ₦145
B. ₦150
C. ₦152
D. ₦140
E. ₦120

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