Practice Questions • 20 Questions
Define the term 'marginal cost'. (2 marks)
State the formula for contribution per unit and explain how contribution relates to profit. (2 marks)
Sunrise Kitchens Ltd is considering launching a new oak chopping board. The variable costs per board are: (a) Using marginal costing principles, calculate the minimum selling price at which Sunrise Kitchens should sell the chopping board. (1 mark) (b) Explain why this figure is regarded as the minimum price. (1 mark) (c) State ONE reason why Sunrise Kitchens would need to set the actual selling price above this minimum. (1 mark)
A company is deciding whether to continue making a component in-house or to purchase it from an external supplier. The management accountant has excluded the existing fixed overhead allocation from the analysis. The production capacity freed up by outsourcing would be left idle. Explain why fixed costs are not relevant to this make-or-buy decision. (3 marks)
Explain TWO features of fixed costs in the context of marginal costing. (4 marks)
Harrington Fitness Ltd manufactures exercise resistance bands. Fixed costs: £15,000 per month Selling price per unit: £40.00 Variable cost per unit: £25.00 (a) Calculate the contribution per unit. (1 mark) (b) Calculate the break-even point in units. (1 mark) (c) Calculate the break-even point in £ revenue. (1 mark) (d) If Harrington Fitness produces and sells 1,400 units in the month, calculate the profit. (1 mark)
Brightwell Electronics Ltd manufactures circuit boards. The company currently operates at 70% of its full production capacity. Normal selling price per unit: £180 Variable cost per unit: £130 Monthly fixed costs: £96,000 (fully covered by normal production) A new overseas customer has offered to buy 400 units at a one-off price of £150 per unit. (a) Calculate the contribution per unit from the special order. (1 mark) (b) Calculate the total additional contribution if the special order is accepted. (1 mark) (c) State whether Brightwell Electronics should accept the order, giving a financial reason. (1 mark) (d) State ONE condition that must hold for marginal costing to justify accepting this order. (1 mark)
Explain TWO limitations of break-even analysis as a planning tool for a new business. (4 marks)
Explain why absorption (full) costing can give a misleading picture of a department's performance when deciding whether to close it. (4 marks)
State and explain TWO advantages of using marginal costing rather than absorption costing for internal management decision making. (4 marks)
State and explain TWO limitations of marginal costing for a manufacturing business. (4 marks)
Identify and briefly explain each stage of the IPFCR report structure used when presenting a management accounting recommendation. (5 marks)
Bridgewater Stores Ltd has three departments. The manager of the Homewares department has proposed closing it because absorption costing shows it making a loss. The following information relates to the Homewares department for the year: The £32,000 represents head office overheads allocated on the basis of floor space. These costs would not be eliminated if the Homewares department closed. (a) Calculate the contribution of the Homewares department. (1 mark) (b) Explain why the fixed cost allocation is not relevant to the closure decision. (2 marks) (c) Advise the manager whether to close the Homewares department, with full financial justification. (3 marks)
Hargreaves Candles Ltd produces scented candles. The following information is available: (a) Calculate the contribution/sales (C/S) ratio. (2 marks) (b) Using the C/S ratio, calculate the break-even point in £ revenue. (2 marks) (c) Hargreaves is considering reducing the selling price to £7.50 to increase demand. Explain the effect this price reduction would have on the C/S ratio and on the break-even point in £ revenue. (2 marks)
Tyne Bakery Ltd produces artisan bread rolls. The following information is available for the month of October: Fixed costs for October: £12,600 Units produced and sold in October: 3,000 Prepare a marginal costing statement for Tyne Bakery Ltd for October. (8 marks)
Clifton Sports Ltd manufactures tennis rackets. The following information is available: (a) Calculate the contribution per unit. (1 mark) (b) Calculate the break-even point in units. (1 mark) (c) Calculate the margin of safety in units, in £, and as a percentage. (3 marks) (d) Calculate the contribution/sales (C/S) ratio. (1 mark) (e) Calculate the number of units Clifton Sports must sell to achieve its target profit of £12,000. (2 marks)
Apex Components Ltd currently manufactures 20,000 gear units per year. The costs per unit are: An external supplier has offered to supply the gear units at £9.20 each. If bought in, the factory space currently used would be left idle. (a) Calculate the variable (marginal) cost of making one gear unit. (1 mark) (b) Calculate the total annual saving or extra cost of buying in rather than making the gear units. (2 marks) (c) State whether Apex should make or buy the gear units, giving a reason based on your calculations. (2 marks) (d) State TWO non-financial factors that Apex Components should consider before making this decision. (2 marks) (e) Explain why the fixed overhead allocation of £2.50 per unit is not relevant to this decision. (1 mark)
Pinnacle Engineering Ltd manufactures three products: Alpha, Beta, and Gamma. Direct labour hours are limited to 12,000 hours in the coming month due to a shortage of skilled workers. Monthly fixed costs: £85,000 (a) Calculate the contribution per unit for each product. (3 marks) (b) Calculate the contribution per direct labour hour for each product and rank the products in priority order. (4 marks) (c) Prepare the optimal production plan showing the units of each product to be produced, and calculate the maximum profit for the month. (3 marks)