SmartSolution Ltd has decided to launch a new type of high-tech vacuum cleaner. The company should make a decision whether to manufacture it using a labour-intensive or capital-intensive production line. The product has the following cost structure for every line. Labour intensive £ Capital intensive £ Direct labour 56 28 Direct material 34 34 Variable overheads 8 6 Each cleaner will be sold for £135, and the annual fixed cost for the labour-intensive model is £131,150 while it is £287,400 for the capital intensive model of production. All the direct costs are considered variable costs. Required For each production line: a) Calculate both the number of units (to the nearest unit) and the revenue the company needs to break even. b) If budgeted sales are 4,500 units, what is the margin of safety expressed as a percentage? c) Calculate the company profit in the following cases: i) SmartSolution achieved the budgeted sales, 4,500 units. SmartSolution achieved higher sales by 17% of the budgeted sales. SmartSolution achieved lower sales by 17% of the budgeted sales. d) SmartSolution would like to make a profit of £120,000 per annum. How many vacuum cleaners do they need to sell annually to achieve this target profit? e) Write a report to the Directors of SmartSolution commenting on your answers in a), b), c), & d) above.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
SmartSolution Ltd has decided to launch a new type of high-tech vacuum cleaner. The company should make a decision whether to manufacture it using a labour-intensive or capital-intensive production line. The product has the following cost structure for every line.
|
Labour intensive £ |
Capital intensive £ |
|
|
Direct labour |
56 |
28 |
|
Direct material |
34 |
34 |
|
Variable overheads |
8 |
6 |
Each cleaner will be sold for £135, and the annual fixed cost for the labour-intensive model is £131,150 while it is £287,400 for the capital intensive model of production.
All the direct costs are considered variable costs.
Required
For each production line:
a) Calculate both the number of units (to the nearest unit) and the revenue the company needs to break even.
b) If budgeted sales are 4,500 units, what is the margin of safety expressed as a percentage?
c) Calculate the company profit in the following cases:
i) SmartSolution achieved the budgeted sales, 4,500 units.
-
SmartSolution achieved higher sales by 17% of the budgeted sales.
-
SmartSolution achieved lower sales by 17% of the budgeted sales.
d) SmartSolution would like to make a profit of £120,000 per annum. How many vacuum cleaners do they need to sell annually to achieve this target profit?
e) Write a report to the Directors of SmartSolution commenting on your answers in a), b), c), & d) above.
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