Introduction to Management Accounting | 4QQMN502

Week 2 – Relevant Costs for Decision Making

Tutorial Questions

Question 1

Jane is thinking of starting a business making pancakes from a market stall on Guildford High Street
on Farmers’ market day. The following information applies:
Cost of hiring trailer for 1 day £140
Cost of hiring the space on the High Street for 1 day £160
Estimated sales price £2.2 per regular pancake
Estimated cost of mix to make a regular pancake is £0.2.

As well as the regular pancake Jane now intends to introduce a large pancake. The following details
apply:
The regular sell for £2.2 and the large for £3.4.
The regular needs 1 egg for the mix and the cost of the mix is £0.2. The large needs 2 eggs per mix and
the cost of the mix is £0.4.
The cost of the trailer and space hire are as before (£140 and £160).
The demand per day for the pancakes is:
Regular 180 pancakes
Large 100 pancakes

If Jane only has 300 eggs for the day recommend a production mix that will maximise Jane’s profit and
calculate the resulting profit.

Question 2

XYZ Ltd makes 3 products and for the current period there is a shortage of skilled labour with only
10,000 hours available. The selling price and cost per unit for each of these products is as follows:

Product X Product Y Product Z

£ £ £
Direct materials 64 45 54
Direct labour (paid £7/hour) 56 49 70
Selling price 160 150 184

Fixed overheads for the period are £50,000.

The maximum demand for each product is:

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 Product X 350
Product Y 550
Product Z 480

Required:
Determine the production mix that will maximise profit in the current period and calculate the
resulting profit (assume part units can be made).

Question 3

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Question 4

Answer the following questions:

Question 5

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Question 6

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Question 7

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Question 8

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Question 9

The Telephone Co. (T Co) is a company specializing in the provision of telephone systems for
commercial clients. There are two parts to the business:
- Installing telephone systems in businesses, either first time installations or replacement
installations;
- Supporting the telephone systems with annually renewable maintenance contracts.
T Co. has been approached by a potential customer, Push Co., who wants to install a telephone system
in new offices it is opening. Whilst the job is not a particularly large one, T Co. is hopeful of future
business in the form of replacement systems and support contracts for Push Co. T Co. is therefore
keen to quote a competitive price for the job. The following information should be considered:
1. One of the company’s salesman has already been to visit Push Co., to give them a
demonstration of the new system, together with a complimentary lunch, the costs of which
totalling £400.
2. The installation is expected to take one week to complete and would require three engineers,
each of whom is paid a monthly salary of £4,000. The engineers have just had their annually
renewable contract renewed with T Co. One of the three engineers has spare capacity to
complete the work, but the other two would have to be moved from contract X in order to
complete this one. Contract X generates a contribution of £5 per engineer hour. There are no
other engineers available to continue with Contract X if these two engineers are taken off the
job. It would mean that T Co. would miss its contractual completion deadline on Contract X by
one week. As a result, T Co. would have to pay a one-off penalty of £500. Since there is no
other work scheduled for their engineers in one week’s time, it will not be a problem for them
to complete Contract X at this point.
3. T Co.’s technical advisor would also need to dedicate eight hours of his time to the job. He is
working at full capacity, so he would have to work overtime in order to do this. He is paid an
hourly rate of £40 and is paid for all overtime at a premium of 50 per cent above his usual
hourly rate.
4. Two visits would need to be made by the site inspector to approve the completed work. He is
an independent contractor who is not employed by T Co., and charges Push Co. directly for
the work. His cost is £200 for each visit made.
5. T Co.’s system trainer would need to spend one day at Push Co. delivering training. He is paid
a monthly salary of £1,500 but also receives commission of £125 for each day spend delivering
training at a client’s site.
6. 120 telephone handsets would need to be supplied to Push Co. The current cost of these is
£18.20 each, although T Co. already has 80 handsets in inventory. These were bought at a
price of £16.80 each. The handsets are the most popular model on the market and frequently
requested by T Co.’s customers.
7. Push Co. would also need a computerized control system called ‘Swipe 2’. The current market
price of Swipe 2 is £10,800, although T Co. has an older version of the system, ‘Swipe 1’, in
inventory, which could be modified at a cost of £4,600. T Co. paid £5,400 for Swipe 1 when it
ordered it in error two months ago and has no other use for it. The current market price of
Swipe 1 is £5,450, although if T Co. tried to sell the one they have, it would be deemed to be
‘used’ and therefore only worth £3,000.

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 8. 1,000 meters of cable would be required to wire up the system. The cable is used frequently
by T Co. and it has 200 meters in inventory, which cost £1.20 per meter. The current market
price for the cable is £1.30 per metre.
9. You should assume that there are four weeks in each month and that the standard working
week is 40 hours long.

Required:
Prepare a cost statement, using relevant costing principles, showing the minimum cost that T Co.
should charge for the contract.

Question 10

The production manager of your organization has approached you for some costing advice on project
X, a one-off order from overseas that he intends to tender for. The costs associated with the project
are as follows:

£
Material A 4,000
Material B 8,000
Direct labour 6,000
Supervision 2,000
Overheads 12,000
32,000

You ascertain the following:

1. Material A is in stock and the above was the cost. There is now no other use for material A,
other than the above project within the factory, and it would cost £1,750 to dispose of.
Material B would have to be ordered at the cost shown above.
2. Direct labour costs of £6,000 relate to workers that will be transferred to this project from
another project. Extra labour will need to be recruited to the other project at a cost of £7,000.
3. Supervision costs have been charged to the project on the basis of 33 1⁄3 per cent of labour
costs and will be carried out by existing staff within their normal duties.
4. Overheads have been charged to the project at the rate of 200 per cent on direct labour.
5. The company is currently operating at a point above break-even.
6. The project will need the utilization of machinery that will have no other use to the company
after the project has finished. The machinery will have to be purchased at a cost of £10,000
and then disposed of for £5,250 at the end of the project.

The production manager tells you that the overseas customer is prepared to pay up to a maximum of
£30,000 for the project and a competitor is prepared to accept the order at that price. He also informs
you the minimum that he can charge is £40,000 as the above costs show £32,000, and this does not
take into consideration the cost of machine and profit to be taken on the project.

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Required:
(a) Cost the project for the production manager, clearly stating how you have arrived at your
figures and give reasons for the exclusion of other figures.
(b) Write a report to the production manager stating whether the organization should go ahead
with the tender for the project, the reasons why and the price, bearing in mind that the
competitor is prepared to undertake the project for £30,000.
Note: the project should only be undertaken if it shows a profit.
(c) State four non-monetary factors that should be taken into account before tendering for this
project.
(d) What would be your advice if you were told that the organization was operating below break-
even point? Give reasons for your advice.

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