Chapter 18 - Marginal costing for decision making

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Chapter 18

Question 3

Marx Muller Limited plans budget income and expenditure as follows, in respect
of the sale and manufacture of 500 units of its product in July 20X7:

	£
Sales: 500 units x £30	15 000
Costs
Direct costs (material and labour)	(7 000)
Production overheads (absorbed at £8 per unit)	(4 000)
	4 000
Selling and administrative overhead	(2 000)
Net profit	2 000

All direct costs are variable, but both production andselling and administrative
overheads are fixed in nature.

Question 5

In August 20X2 Bennie & Woodford Limited incurs the following costs and
revenues in manufacturing and selling 8000 units of its productX:

	£
Production supervision	8 000
Factory premises costs (rental, insurance and so on)	12 600
Direct materials	12 000
Direct labour	16 000
Depreciation of machinery	1 000
Selling and administration costs	10 400
Sales	56 000

Which of the following costs incurred by a commercial airline can be classified as variable?
1. Depreciation of aircraft
2. Interest costs on leasing of aircraft
3. Pilots' salaries
4. None of these three costs can be classified as variable
Which of the following costs incurred by a holiday tour operator can be classified as variable?
1. Commission paid to sales staff in respect of number of holidays sold
2. Depreciation of office computer system
3. Payments to photographers for brochure pictures
4. None of these
See information. What is the additional cost of manufacturing one further unit of product in July 20X7?
1. £4
2. £14
3. £22
4. £26
Which of the following three statements about marginal costing are correct?
i) Marginal costing is an approach to costing that excludes fixed costs
ii) Marginal costing provides a sounder basis for decision making than absorption costing
iii) Marginal costing is only useful in respect of businesses that incur variable costs
1. All of them
2. i) and ii) only
3. i) and iii) only
4. i) and iii) only
Bennie & Woodford Limited, see information. What is the contribution per unit of product?
1. £7.00
2. £0.80
3. £2.50
4. £3.50
Fitzwarren and Hamid Limited manufactures a standard model of garden gate. The selling price of a gate is £95. Variable costs of manufacture are £38. During the 20X5 financial year, the company expects to incur fixed production costs of £60 000 and fixed selling and administration overheads of £22 000.
How many garden gates will the company have to sell in order to break even (to nearest whole unit)?
1. 1439
2. 2158
3. 863
4. 1053
Farmer and Finn Products Limited manufactures milk churns. The selling price of each churn is £55, and variable costs of manufacture are £21.50. The company currently incurs fixed costs at a level of £135 000, but the finance director has produced new projections which estimate a 10% increase in the coming year, 20X8. The directors have decided that they require a profit of £60 000 in 20X8.
How many milk churns must the company sell in 20X8 in order to meet the directors' required profit level (to nearest whole unit)?
1. 6224
2. 3791
3. 5821
4. 4433
Gordon Grace & Co Limited manufactures high specification lawn mowers. In the current 20X4 financial year the selling price of a mower is £550. Variable labour costs are £86 and variable materials costs are £103 per unit. Fixed costs in 20X4 totalled £75 300.
The directors are currently working on the budget for the 20X5 financial year. Variable labour costs are expected to rise by 5% and because of the rapidly increasing cost of aluminium materials costs are likely to increase by 10%. Selling prices, because of competition, can rise by only 3%. The company will control fixed costs carefully and an increase of only £2000 is anticipated.
How many mowers will the company budget to sell in 20X5 in order to maintain its present net profit level of £50 000 (to nearest whole unit)?
1. 351
2. 213
3. 225
4. 138
Hill and Hamer Limited makes specialist file storage units for use in solicitors' offices. In the 20X2 financial year each unit will sell for £178. Costs of manufacture are: direct materials £38 and direct labour £26. Fixed costs are budgeted at £126 680. The net profit budgeted for 20X2 is £92 270.
What is the company's margin of safety in units (to the nearest whole unit)?
1. 1921
2. 302
3. 810
4. 1111
The basic decision rule on acceptance of special contracts is:
1. Accept the special contract if the additional revenue from the contract exceeds the fixed costs of manufacture
2. Accept the special contract if additional fixed costs can be covered by contribution from other products
3. Accept the special contract if it produces a positive contribution to fixed costs
4. Accept the special contract if it produces a positive contribution to variable costs

Chapter 18 - Marginal costing for decision making

Multiple-choice exercise