Q2: Critically discuss the role of ethics, environment and sustainability for a business and their implications on company performance and strategy.
Q9: (Chapter 2 – Relevant Costing)
Domino Ltd is a manufacturer of various types of electric units. Recently one of its large
customers, Mango Ltd has offered a contract to Domino Ltd for the supply of
820 units. Below are the details for the production of each unit:
Material X: 4 kg is required per unit. Currently 3,000 kg is held by the business and it is
constantly used. This material of was originally bought for £54 per kg. It would cost £65
per kg to replace it. Sales value is £60 per kg.
Material Y: 6 kg is required per unit. Currently 3,800 kg is held by the business. This
material of was originally bought for £31 per kg. The material was not used by the
business for last two years. Its scrap value is only £11 per kg. Replacement cost for
material Y is £27 per kg. The only foreseeable alternative use is as a substitute for
material K (in constant use) but this would involve further processing cost of £6 per kg.
The current buying cost of material K is £18 per kg.
Material Z: 3 kg is required per unit. It is regularly used by the business and currently
there is none available in the business. An order for 1,500 kg is shortly to be placed for
another project by the business. The price for this material is £65 per kg, but the supplier
allows a bulk discount of 10%, for the entire order, for orders of 3,500 kg and above.
Skilled labour: Each unit requires 5 hours of skilled labour. It is currently paid at a rate
of £37 per hr and skilled labour is hired on a permanent basis. 1,400 hours can be
provided by members of staff who currently have no work to do due to a quiet time, but
still employed by the company. Only taking staff off other work can provide the remaining
hours needed for this new project. This other work is charged out to customers at £85 an
hour and material cost is £25 per hour.
Semi-skilled labour: Each unit requires 3 hours of semi-skilled labour. It is currently paid
£13 per hour. If the required semi-skilled labour for this project is provided by the existing
members of staff who are busy, the business will have to hire new employees at a rate of
£17 per hour.
Specialised study: To derive the above estimates, the business had to spend £6,200 on
a specialised study. If the contract does not proceed, the results of the study can be sold
for £7,100 in the market.
Overheads: It is Domino’s policy to charge a share of the general costs (rent, heating
and so on) to each contract undertaken at the rate of £12 for each skilled labour hour
used on the contract. If this project is undertaken, the general costs are expected to
increase as a result of undertaking the contract by £4,300.
Required
Calculate the minimum price at which the contract could be undertaken by Domino
Ltd. For each part, you should clearly show supporting workings and provide a brief
explanation for your choice.(Total: 10 marks)
Q8: Saturn Ltd has three products all of which require the same production facilities.
Financial data on the three products are as follows:
Product X Y Z
£ £ £
Selling price per unit (£) 200 160 135
Variable Material Cost per
unit (£) 45 50 35
Variable Labour Cost per unit
(£) 47 44 40
The share of Fixed overhead
per unit (£) 6 6 6
Machine time per unit (hours) 9 8 4
Monthly market demand in
units (units) 2,400 1,200 800
The same machine is used to produce all three products and hence, fixed cost is not
affected.
The business has a machine time capacity of 32,400 hours per month.
Total fixed cost per month is £175,000.
Required:
A) With supported workings, show which combination of products to be produced to
achieve the highest profit for the company.
Clearly show your workings which show the no of units to be produced, total
contribution and total profit/(loss) (8 marks)
B) If the business were to produce only product Z for the next month:
– How many units of product Z should be produced to break- even? (Note: Assume for
this part of the question that there is no effective limit to market size and staffing level)
– What is is the contribution margin ratio % for product Z?
– How many units of product Z should be sold by Saturn Ltd in order to achieve a target
profit of £120,000 per month.
