Tag (SQ): fixed costs

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  • 20 Marks

MA – L2 – Q70 – Performance analysis

Calculate the impact of three strategies on annual profit for Kumasi Ventures Ltd, each implemented independently.

Kumasi Ventures Ltd manufactures and sells a single product. Its budget for the next financial year is as follows:

Sales (80,000 units at GH₵600 per unit) GH₵000
48,000
Production costs: materials and labour 16,000
Other production costs 8,000
Marketing and distribution costs 12,000
Administration costs 10,000
Total costs 46,000
Profit 2,000

Materials and labour costs in production are 100% variable, and 25% of other production costs are variable. All administration costs are fixed costs and two-thirds of marketing and distribution costs are also fixed.

The directors of Kumasi Ventures Ltd are dissatisfied with the budgeted profit, and believe that annual profits should be at least double the size of the budgeted profit.

Three strategies have been proposed to improve profitability.

(1) Strategy 1. Increase sales by opening a new sales office in a neighbouring country. It is expected that this would increase annual sales by 5,000 units, but would add GH₵1.2 million to annual fixed costs.

(2) Strategy 2. Re-design the product by adding several additional features that should add value for the customer. This would have no effect on annual sales volume in units, but the company would be able to raise the sales price to GH₵625. The additional costs of producing the new product design would be GH₵1.5 million each year (all fixed costs).

(3) Strategy 3. Implement a cost reduction exercise throughout the company. It is expected that the planned exercise would reduce all variable costs by 20%, but would add to annual fixed costs by GH₵3.5 million.

Required:
(a) Calculate the effect of each individual strategy on annual profit, assuming that the strategy is implemented on its own, without the other two strategies.

(b) Show whether the three strategies, if they are all introduced together, will close the profit gap between the budgeted profit and the target profit that the directors would like to achieve.

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  • 20 Marks

MA – L2 – Q52a – Relevant Cost and Revenue

Advise whether Okonku Enterprises should discontinue Double bed production based on contribution and profit impact.

Okonku Enterprises produces Single, Double, and King size beds for sale to hotels in West Africa. Its manufacturing plant is located in Keta and is currently producing at 100% capacity. Below is the annual output and sales for each product and the associated costs.

Product Single bed Double bed King Size
Units sold 5,000 units 3,500 units 4,000 units
Sales GH₵ 2,500,000 GH₵ 2,800,000 GH₵ 3,800,000
Cost
Material cost 750,000 1,400,000 1,520,000
Labour costs 600,000 1,050,000 1,200,000
Manufacturing O’head 200,000 650,000 300,000
Administrative cost 200,000 100,000 200,000
Total cost 1,750,000 3,200,000 3,220,000
Profit /Loss 750,000 (400,000) 580,000

The Director of Okonku is of the view that the product Double bed is not doing well and must not be produced any longer. The following additional information has been provided.
(i) 40% of the labour cost for all bed types are fixed costs.
(ii) 50% of the manufacturing overhead is variable costs for all products.
(iii) 80% of the administrative cost is fixed.

Required:
(a) Advise whether the company should shut down the production of Double beds.

(b) Should the company accept the new order assuming Double beds will still be produced?

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  • 15 Marks

MA – L2 – Q48 – Decision Making Techniques

Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

Blue Horizon Industries Limited (BHIL) produces and markets three products viz. Alpha, Beta, and Gamma. Following information is available from BHIL’s records for the manufacture of each unit of these products:

Alpha Beta Gamma
Selling price GH₵ 66 GH₵ 106 GH₵ 124
Material-A (GH₵ 4 per kg) GH₵ 8 GH₵ 12 GH₵ 12
Material-B (GH₵ 6 per kg) GH₵ 12 GH₵ 24 GH₵ 24
Direct labour (GH₵ 10 per hour) GH₵ 25 GH₵ 25 GH₵ 30
Variable overhead based on:
– Labour hours GH₵ 1.8 GH₵ 1.5 GH₵ 1.8
– Machine hours GH₵ 1.4 GH₵ 1.2 GH₵ 1.2
Total GH₵ 3.2 GH₵ 2.7 GH₵ 3.0
Other data:
Machine hours 7 6 6
Maximum demand per month (units) 3,000 3,000 5,000

Additional information:
(i) BHIL is also engaged in the trading of a fourth product Zeta, which is very popular in the market and generates a positive contribution. BHIL currently purchases 600 units per month of Zeta from a supplier at a cost of GH₵ 40 per unit. In-house manufacture of Zeta would require: 2.5 kg of material-B, 1 hour of direct labour, and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely to continue for the next 8 months.
(iii) BHIL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units of Beta, and 400 units of Gamma each month for the next 8 months. These quantities are in addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.

Required:
Determine whether BHIL should manufacture Zeta internally or continue to buy from the supplier during the next 8 months.

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  • 15 Marks

MA – L2 – Q47 – Decision Making Techniques

Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.

An engineering company has been experiencing problems with restricted availability of resources. The company manufactures a variety of casings. It makes four types of casing. Each casing requires the same bought-in component and some high-grade steel. The standard costs for the four types of casing are as follows:

Casing A B C D
GH₵ GH₵ GH₵ GH₵
Steel 250 500 190 390
Bought-in component 50 50 50 50
Direct labour 60 60 50 100
Variable production costs 40 50 40 50
Fixed production costs 180 240 150 270
Selling and administration costs 145 225 120 215
Profit 35 55 30 55
Selling price 760 1,180 630 1,130

All the selling and administration costs are fixed and the same single component is used for each of the four products. Direct labour is paid GH₵8 per standard hour and each member of the workforce is capable of producing any of the casings.
The company’s main customer has ordered 30 units of Casing A, 20 units of B, 30 units of C, and 20 units of D for production and delivery in the next month. Senior management have agreed that this order should be treated as a priority order and that these casings must be manufactured and delivered to the customer next month. This is necessary to maintain the goodwill of the customer. It is estimated that this order represents 10% of the total demand next month for each type of casing.
The company operates a just-in-time system, and has no inventories of steel, components, or finished goods.
Required:
If the aim is to maximise profit for the month, establish the production and selling plan for the company next month in the following situation:
(a) Situation 1. Supplies of steel are limited to GH₵250,000.

(b) Situation 2. Only 400 bought-in components are available from suppliers.

(c) Situation 3. A labour dispute restricts available productive labour hours in the month to 2,125.

(d) Situation 4. A labour dispute restricts available productive labour hours in the month to 2,125; but the manufacture of any quantities of the four casings could be sub-contracted to an outside supplier. The cost of buying the casings externally would be GH₵475, GH₵705, GH₵380, and GH₵640 for Casing A, Casing B, Casing C, and Casing D respectively. In addition, it should be assumed that the major customer insists that its order is completed by the company itself and the manufacture should not be subcontracted.

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  • 15 Marks

MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

Ouluto Limited (OUL) is engaged in the manufacture and sale of three products viz. WBA, QPR and SC. The following information is available from OUL’s records for the month of February 20X9:

WBA QPR SC
Sales price per unit (GH₵) 2,300 1,550 2,000
Material cost per Kg. (GH₵) 250 250 250
Labour time per unit (Minutes) 20 30 45
Machine time per unit (Hours) 4 2.5 3
Net weight per unit of finished product (Kg.) 6 4 5
Yield (%) 90 95 92
Estimated demand (Units) 10,000 20,000 9,000

Each worker is paid monthly wages of GH₵15,000 and works a total of 200 hours per month. OUL’s total overheads are estimated at 20% of the material cost.
Fixed overheads are estimated at GH₵5 million per month and are allocated to each product on the basis of machine hours. 100,000 machine hours are estimated to be available in February 20X9.
Required:
Based on optimum product mix, compute OUL’s net profit for the month of February 20X9.

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  • 15 Marks

MA – L2 – Q41 – Cost-volume-profit (CVP) analysis

Calculate breakeven point in units and sales value for Nartey Enterprises based on budgeted profit statement.

Nartey Enterprises, a manufacturing organisation, has a budgeted profit statement for its next financial year, when it is expected to be operating at 75% level of capacity. The budget is given below:

GH₵ GH₵
Sales 9,000 units at GH₵32 288,000
Less:
Direct materials 54,000
Direct wages 72,000
Production overhead:
fixed 36,000
variable 18,000
Administration and distribution costs:
fixed 42,000
variable 27,000 249,000
Profit 39,000

Required:
(a) Calculate the breakeven point in units and in sales value.

  (b) Calculate the contribution/sales ratio.                                                                                                                                                                  (c) Calculate the number of units to be sold to earn a profit of GH₵52,000.

    (d) Calculate the profit that would be expected if the company operated at full capacity.

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  • 15 Marks

MA – L2 – Q40 – Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and units for AquaPure Limited at GH¢16 per bottle using budgeted cost data.

AquaPure Limited is planning to produce mineral water. It is contemplating to purchase a plant with a capacity of 100,000 bottles a month. For the first year of operation the company expects to sell between 60,000 to 80,000 bottles. The budgeted costs at each of the two levels are as follows:

Particulars 60,000 bottles 80,000 bottles
Material 360,000 480,000
Labour 200,000 260,000
Factory overheads 120,000 150,000
Administration expenses 100,000 110,000

The production would be sold through retailers who will receive a commission of 8% of sale price.

Required:
(a) Compute the break-even point in GH¢ and units if the company decides to fix the sale price at GH¢16 per bottle.

(b) Compute the break-even point in units if the company offers a discount of 10% on purchase of 20 bottles or more, assuming that 20% of the sales will be to buyers who will avail the discount.

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  • 20 Marks

MA – L2 – Q39 – Cost-volume-profit (CVP) analysis

Compute break-even sales for Fuseni Limited's two products, maintaining budgeted sales ratio, with detailed overhead allocation.

Fuseni Limited has two divisions each of which makes a different product. The budgeted data for the next year is as under:

Product A Product B
Sales GH¢ 200,000,000 GH¢ 150,000,000
Direct material GH¢ 45,000,000 GH¢ 30,000,000
Direct labour GH¢ 60,000,000 GH¢ 45,000,000
Factory overheads GH¢ 35,000,000 GH¢ 15,000,000
Price per unit GH¢ 20 GH¢ 25

Details of factory overheads are as follows:
(i) Product A is stored in a rented warehouse whose rent is GH¢0.25 million per month. Product B is required to be stored under special conditions. It is stored in a third party warehouse and the company has to pay rent on the basis of space utilised. The rent has been budgeted at GH¢0.12 million per month.
(ii) Indirect labour has been budgeted at 20% of direct labour. 70% of the indirect labour is fixed.
(iii) Depreciation for assets pertaining to product A and B is GH¢6.0 million and GH¢2.0 million respectively.
(iv) 80% of the cost of electricity and fuel varies in accordance with the production in units and the total cost has been budgeted at GH¢4.0 million.
(v) All other overheads are fixed.

Required:
Compute the break-even sales assuming that the ratio of quantities sold would remain the same, as has been budgeted above.

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  • 15 Marks

MA – L2 – Q38- Cost-volume-profit (CVP) analysis

Compute break-even point in GH¢ and margin of safety for Ofori Fabricators based on last year's sales and cost data.

Ofori Fabricators produces and markets a single product. Presently, the product is manufactured in a plant that relies heavily on direct labour force. Last year, the company sold 5,000 units with the following results:

GH¢
Sales 22,500,000
Less: Variable expenses 13,500,000
Contribution margin 9,000,000
Less: Fixed expenses 6,300,000
Net income 2,700,000

Required:
(a) Compute the break-even point in GH¢ and the margin of safety.

(b) Calculate the contribution margin ratio and the break-even point in units if the variable cost per unit increases by GH¢600? Also calculate the selling price per unit if the company wishes to maintain the contribution margin ratio achieved during the previous year.

(c) The company is also considering the acquisition of a new automated plant. This would result in the reduction of variable costs by 50% of the amount computed in (b) above whereas the fixed expenses will increase by 100%. If the new plant is acquired, how many units will have to be sold next year to earn net income of GH¢3,150,000.

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  • 15 Marks

MA – L2 – Q35 – Relevant cost and revenue

Compute relevant cost of producing a motor, considering materials, labour, machine costs, and overheads, with reasons for cost inclusion/exclusion.

Apex Manufacturing Limited (AML) is engaged in the manufacture of specialised motors. The company has been asked to provide a quotation for building a motor for a large textile industrial unit in Kumasi. Following information has been obtained by AML’s technical manager in a one-hour meeting with the potential customer. The manager is paid an annual salary equivalent to GH¢2,500 per eight-hour day.

(i) The motor would require 120 ft. of Wire-C which is regularly used by AML in production. AML has 300 ft. of Wire-C in inventory at the cost of GH¢65 per ft. The resale value of Wire-C is GH¢63 and its current replacement cost is GH¢68 per ft.

(ii) 50 kg of another material viz. Wire-D and 30 other small components would also be required by AML for the motor. Wire-D would be purchased from a supplier at GH¢10 per kg. The supplier sells a minimum quantity of 60 kg per order. However, the remaining quantity of Wire-D will be of no use to AML after the completion of the contract. The other small components will be purchased from the market at GH¢80 per component.

(iii) The manufacturing process would require 250 hours of skilled labour and 30 machine hours.
The skilled workers are paid a guaranteed wage of GH¢20 per hour and the current spare capacity available with AML for such class of workers is 100 direct labour hours. However, additional labour hours may be obtained by either:

  • Paying overtime at GH¢23 per hour; or
  • Hiring temporary workers at GH¢21 per hour. These workers would require 5 hours of supervision by AML’s existing supervisor who would be paid overtime of GH¢20 per hour.
    The machine on which the motor would be manufactured was leased by AML last year at a monthly rent of GH¢5,000 and it has a spare capacity of 110 hours per month. The variable running cost of the machine is GH¢15 per hour.

(iv) Fixed overheads are absorbed at the rate of GH¢25 per direct labour hour.

Required:
Compute the relevant cost of producing the textile motor. Give brief reasons for the inclusion or exclusion of any cost from your computation.

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