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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 8 170 1360
at reduced selling price

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

Selling price per unit 3.6
Variable costs
materials 1.4
labour 1 2.4
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

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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 3.5 4,000 = 400 units

10

Q 3.6 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.

Q 3.7

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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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 A B C
Budgeted sales (units) 2,500 3,000 3,000

Sales price per unit 40 39 75
Variable cost per unit
Material
(1kg of material costs 6) 12 6 8
Labour
(pay is 8 per hour) 12 20 32
Variable overheads 5 4 13
Total variable cost per unit 29 30 53
Contribution per unit 11 9 22
Total contribution 27500 27000 66000 120,500
Fixed overhead (Note 1) = 2,500 x 6 + 3,000 x 10 + 3,000 x 16 = 93,000
Profit 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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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 11 8 22
kgs 2 1 1.33
Contribution per kg 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 Area3
No.clients 200 150 120
Averagebilling 1680 1400 1800

Revenue 336,000 210,000 216,000
Carerscost 120,000 90,000 72,000
Consumables 40,000 60,000 48,000
Supervisors
bonus 3,360 2,100 2,160
Officecost 50,000 37,000 30,000
Totalcost 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

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c) Alternative 1

Area 1 Area 2 Area3

No.clients 200 150 120
Averagebilling 2000 2000 2000

Revenue 400,000 300,000 240,000
Carerscost 180,000 135,000 108,000
Consumables 80,000 120,000 96,000
Supervisors
bonus 4,000 3,000 2,400
Officecost 50,000 37,500 30,000
Totalcost 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 Area3

No.clients 200 150 120
Averagebilling 1764 1470 1890

Revenue 352,800 220,500 226,800
Carerscost 120,000 90,000 72,000
Consumables 40,000 60,000 48,000
Supervisorsbonus 3,528 2,100 2,160
Officecost 50,000 37,500 30,000
Additionalfixedcosts 5,300 5,301 5,302
Totalcost 218,282 194,901 157,462
Contribution 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
Additionalcost 16,000

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Q 3.11
a)

MaterialA 6,000
MaterialB 15,300
MaterialC 10800

Directlabour 24000
Depreciation 500
Supervisor 11,000

Totalcost 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.

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