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Chapter 3 Further Decision-Making Problems Answers to End of Chapter Exercises

Q

3.1a

 

£

Units

Total contribution

 
 

Current contribution

10

150

1500

revised contribution at reduced selling price

8

170

1360

The suggestion of the marketing manager leads to a lower contribution

 

Q

3.2

 

Existing policy

 

£

£

Selling price per unit

 

4

Variable costs materials

 

1.4

labour

1

2.4

Contribution per unit

 

1.6

Total contribution = £1.6 x 25,000 units =

 

£40,000

a)

 

Fixed costs

£35,000

 

Break-even point =

21,875

Contribution per unit

£1.60

 

Margin of safety

25,000 - 21875

 

X 100 =

12.50%

 

25,000

 

b)

Proposal of the sales manager

 
 

£

£

 

3.6

 

Selling price per unit Variable costs materials

1.4

1

2.4

labour Contribution per unit

1.2

Total contribution = £1.2 x 31,250 units =

 

£37,500

Therefore not worthwhile

c)

Proposal of the personnel manager

 

revised contribution

£1.4

Total contribution = £1.4 x 30,000 units =

£42,000

less additional fixed costs

£10,000

Revised profit

£32,000

Therefore not worthwhile

© 2008 John Wiley & Sons Ltd www.wileyeurope.com/college/bowhill

2

Q

3.3

Component Q

 

Buy-in price

£19

Variable cost

£12

Contribution

£7

Hours

1.5

Contribution /hour

4.67

Product Z

Selling price

£17

Variable cost

£12

Contribution

£5

Hours

1

Contribution/hour

£5

Product Z is preferable

Q 3.4

 

Buy –in £

Make £

Sell

65

65

Buy

60

Make

50

Contribution

5

15

A contribution of £10 if it is made rather than bought. If it takes 4 hours then this is £2.50 per hour. It is therefore possible to pay £9.50 to pay the agency staff.

Q

Q

Q

3.5

3.6

3.7

£4,000 = 400 units

£10

The cost of the engineer is 30 hours x £12 + opportunity cost of £250 = £610. The additional resale value is £500 higher if it is repaired. It is therefore not worthwhile doing.

Rearranging the original data into a contribution statement

 

Units

30,000

1

 

£

£

Sales

90000

3

Var. cost

60000

2

Contribution

30000

1

fixed cost

25000

Profit/loss

5000

(i)

Break even = 25,000 = 25,000 units

1

(ii)

Margin of safety = 30,000 – 25,000 x 100 = 16.6%

 

30,000

 

£/unit

Revised selling price

 

2.85

Variable cost

2.00

Contribution

0.85

Volume

+20%

36,000

 

£

Contribution

30,600

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3

less fixed costs

25,000

New profit/loss

5,600

The contribution has increased and therefore if assumptions are correct this proposal may be worthwhile.

(iii) Increase wages by £0.10 per unit. Variable costs would increase to £2.10 £/unit

Selling price/unit

3.0

Variable costs

2.1

Contribution

0.9

volume

+25%

37,500

units

 

£

Total contribution (before additional fixed costs)

33,750

Increased fixed costs

5,000

Contribution after increased fixed costs

28,750

less original fixed costs

25,000

New Profit/(Loss)

3,750

The contribution is worse than the original contribution and therefore not worthwhile

Q 3.8

Product

Budgeted sales (units)

A

B

C

2,500

3,000

3,000

£

£

£

40

39

75

12

6

8

12

20

32

5

4

13

29

30

53

11

9

22

27500

27000

66000

Sales price per unit

Variable cost per unit Material (1kg of material costs £6) Labour (pay is £8 per hour)

Variable overheads

Total variable cost per unit

Contribution per unit

Total contribution

Fixed overhead (Note 1) = 2,500 x £6 + 3,000 x 10 + 3,000 x 16 =

Profit

£

120,500

93,000

27,500

b) It makes a contribution of £27,500

c) Not on commercial grounds as the variable cost is £2 per unit less. Quality, time, future cost, strategy might be other factors to consider

d) If sales are increased by 20%, contributions will increase by £24,100. This is not worthwhile as costs go up by £30,000 If an in incentive scheme of £2 an hour contribution will be

Revised contribution per unit £

8

4

14

Sales units per product (+15%)

2875

3450

3450

Revised contribution £

23,000

138,000

18,300

85,100

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4

Not worthwhile as contribution gone down by 35,400

e)

kgs required = 2500 x 2 + 3000 x 1 + 3,000x 1.33 = 11,990 kgs. Therefore materal is a

constraint

 

Labour

is 2,500 x 1.5 + 3,000 x 2.5 + 3,000 x 4 = 23,250 hours which is not a constraint

Optimum production plan is based on contribution per kg.

 

Contribution £ kgs Contribution £ per kg

 

11

8

22

2

1

1.33

5.5

8

16.54

The optimum production would be product C followed by product B and finally product A

 

Units

kgs

Cumulative kgs

kgs remaining

Contribution £

 

C

3000

4000

4000

6000

66,000

B

3000

3000

7000

3000

27,000

A

1500

3000

3000

0

16,500

 

109,500

 

Fixed costs

93,000

Profit

16,500

Q 3.9

a)

 

Area 1

Area 2

Area 3

 

No. clients Average billing £

200

150

120

1680

1400

1800

 

£

£

£

 

Revenue

 

336,000

210,000

216,000

Carers cost

120,000

90,000

72,000

Consumables

40,000

60,000

48,000

Supervisors

 

bonus

3,360

2,100

2,160

Office cost

 

50,000

37,000

30,000

Total cost

231,360

189,600

152,160

Contribution

122,640

20,400

63,840

206,880

b)

Area 2 should not be closed as it makes a contribution of £20,400

 

© 2008 John Wiley & Sons Ltd www.wileyeurope.com/college/bowhill

5

c)

Alternative 1

 

Area 1

 

Area 2

Area 3

 

No. clients Average billing £

200

150

120

2000

2000

2000

 

£

£

£

 

Revenue

400,000

 

300,000

240,000

Carers cost

180,000

135,000

108,000

Consumables

80,000

120,000

96,000

Supervisors

bonus

4,000

3,000

2,400

Office cost

50,000

 

37,500

30,000

Total cost

314,000

 

295,500

236,400

Contribution

86,000

4,500

3,600

94,100

Alternative 1 is not worthwhile

 

d)

Alternative 2

 

Area 1

Area 2

Area 3

 

No. clients Average billing £

 

200

 

150

120

 

1764

1470

1890

 

£

£

£

 

Revenue Carers cost Consumables Supervisors bonus Office cost

 

352,800

 

220,500

226,800

 

120,000

90,000

72,000

 

40,000

60,000

48,000

3,528

2,100

2,160

50,000

37,500

30,000

Additional fixed costs Total cost Contribution

 

5,300

5,301

5,302

218,282

 

194,901

157,462

133,972

25,599

69,338

288,909

Alternative 2 is worthwhile

 

Q 3.10

 

£

 

Labour

10,000

 

Material

6,000

Machinery

0

Product

development

0

Overhead

0

Additional cost

16,000

 

© 2008 John Wiley & Sons Ltd www.wileyeurope.com/college/bowhill

6

Q 3.11

a)

 

£

 

Material A

6,000

Material B

15,300

Material C

10800

Direct labour

24000

Depreciation

500

Supervisor

11,000

Total cost

67,600

b)

Relevant cost is £67,600. The company can gain a contribution on any price above this minimum level. If the contract is important for strategic reasons or if demand is very low then a low price may be quoted. The management will need to make a commercial judgement of the importance of the contract.

© 2008 John Wiley & Sons Ltd www.wileyeurope.com/college/bowhill