problem: Process Solutions provides a computer-based document processing service. The accountant has produced the following analysis.
Standard Modified Advanced
Sales quantity 1,000 1,100 1,200
Selling price £5 £5 £6
Sales revenue 5,000 5,500 7,200
Labor hours 100 120 160
Labor cost @ £20/hour 2,000 2,400 3,200
Contribution 3,000 3,100 4,000
Contribution per unit sold £3 £2.82 £3.33
The Sales Manager, whose team is paid a commission on sales revenue, prefers to sell the higher priced advanced service. This is as well the preferred service for the Accountant, though not for the similar reason, as her argument is that the advanced service is better since of the higher contribution per unit sold. The Operations Manager argues that the Advanced Service consumes more labor hours than the Standard or Modified services and as labor availability limits his capability to process work, this must as well be taken into account. The Operations Manager prefers the Standard or Modified service as this gives greater capability to use his capacity more flexibly.
The General Manager has asked for your advice in relation to this disagreement in the management team.
problem: Cowboy Constructions employs a full-time driver and incurs costs for a vehicle to deliver paperwork among each of their building sites. Select Couriers has offered to carry out the work to the similar standard of service for a fixed sum of £2,000 per month. Cowboy’s annual costs are currently:
Salary and on costs of driver £16,000
Salary and on costs of builder who
covers for sickness and annual leave
absences of driver £2,800
Depreciation of vehicle £2,500
Road tax, insurance & servicing £1,000
If Cowboy employs Select Couriers, it will sell the vehicle for £2,000, and the driver’s employment will be terminated devoid of any redundancy payment. The builder who covers for sickness and leave of the driver is currently replaced by casual labor which costs £3,500.
Determine the relevant costs comprised in this decision? Should Cowboy sub-contract its delivery requirements to select? What considerations are there in making this decision?
problem: A spare parts supplier is thinking of building a car from the parts he has in his yard. He doesn’t expect any reward for his labor however wants to know what costs he must comprise for the materials. He has provided the given information:
• The chassis was bought for £100 and has no scrap value.
• A reconditioned engine will cost £375. Though, an old engine was bought for £50. This can either be sold in its present condition for £225 or additional parts costing £250 could be bought to bring to bring the engine to an equivalent standard to the reconditioned one.
• Tyres costing £180 require to be purchased.
• Paint is in stock at a cost of £60 but it will require to be replaced at its current price of £70.
problem: Maximus Company has met all production needs for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and unit costs for three models of one of its product lines are as shown below.
Plain model Regular model Super model
Selling price £30.00 £32.50 £40.00
Direct material £9.00 £10.00 £9.50
Direct labor (@ £5 per hour) £5.00 £7.50 £10.00
Variable overhead £4.00 £6.00 £8.00
Fixed overhead £8.00 £7.50 £7.50
Variable overhead is applied on the basis of direct labor dollars, while fixed overhead is applied on the basis of machine hours. There is enough demand for the additional production of any model of the product line.
a) If Maximus Company has excess machine capacity and can add more labor as required (that is, neither machine capacity nor labor is a constraint), which product is the most attractive to produce? Give computations and reasons to support your answer.
b) If Maximus Company has excess machine capacity but a limited amount of labor time available, to which product or products must the excess production capacity be devoted? Give computations and reasons to support your answer.