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Question One
A Ltd manufactures a single product. Information taken from their records for November is
as follows:
Sales
Production
42,000 Units
45,000 Units
Direct Materials
Direct Labour
Variable manufacturing
overhead
Variable Manufacturing Cost
Fixed Manufacturing Overhead
Unit Cost of Production
75
75
Marginal
Costing
Absorption
Costing
10
12
4
10
12
4
26
26
26
3
29
(b)
(c)
Explain the difference between the profits obtained using each method.
(2 marks)
(d)
Explain how any under or over absorption is calculated using your results for
November above to illustrate your answer.
(2 marks)
Total 18 marks
Workings Question 1
2
Question Two
3
Rose Ltd produces two products details relating to next years production and sales are as
follows:
Demand in units
Direct labour
Direct materials kg.
Selling Price per Unit
Hours
Kg
P1
P2
4,000
2,000
3
8
4
5
75
60
Required :
(a)
(b)
Calculate the contribution per product and hence prioritize the production plan
to maximise profits for next year.
(6 marks)
(c)
(d)
If the company must produce at least 2,000 units of each product show how will
this change the results you have calculated in (c) above.
(6 marks)
(3 marks)
Total 17 marks
Workings Question 2
4
Question Three
5
Baltic Bros is considering the following two machines. The relevant cash flows are as follows
:
Machine A
Machine B
Initial Cost
45,000
50,000
Net Inflows
Year 1
Year 2
Year 3
20,000
30,000
10,000
30,000
20,000
15,000
At the end of the three years machine B can be sold for 4,000 but machine A has no scrap
value.
The companys cost of capital is 14%.
Net Present Value Table
Rate
8%
9%
10%
11%
12%
13%
14%
15%
16%
Year
0
1
2
3
4
5
1.000
0.926
0.857
0.794
0.735
0.681
1.000
0.917
0.842
0.772
0.708
0.650
1.000
0.909
0.826
0.751
0.683
0.621
1.000
0.901
0.812
0.731
0.659
0.593
1.000
0.893
0.797
0.712
0.636
0.567
1.000
0.885
0.783
0.693
0.613
0.543
1.000
0.877
0.769
0.675
0.592
0.519
1.000
0.870
0.756
0.658
0.572
0.497
1.000
0.862
0.743
0.641
0.552
0.476
Required :
a)
Calculate the payback for each machine and decide which machine would be
chosen using this method.
(5 marks)
b)
Calculate the Accounting Rate of Return for each machine and again decide
which project would be selected using this method.
(7 marks)
c)
Using a discount rate of 14% calculate the NPV of each machine and hence
decide using the NPV decision rule which should be accepted.
(8 marks)
d)
Discuss which of the above methods you would recommend to decide between
the two machines.
(5 marks)
Total 25 marks
Workings Question 3
6