The directors of Machiq Limited (see previous case studies) decided to reject Esmeralda’s takeover bid and instead devoted their talents to developing new products.
Trixie, the managing director, had been sent an e-mail containing a recipe for a vanishing potion and decided to investigate the possibility of setting up a separate division to produce and promote it. The creator of the recipe, who had signed herself ‘Mrs Eadale’, said that the potion was totally harmless and caused only temporary invisibility. She also insisted that, as an absolute condition of her allowing Machiq Limited to use the recipe free of charge, the directors must test the potion on themselves before selling it to the general public.
Chiquita, the finance director, produced the following information:
Maximum production and sales p.a. (bottles) 15,000 £
Selling price per bottle 14 Ingredients per bottle 3 Cost of bottle and label 1 Direct labour cost per bottle 2 Rent, rates and other fixed costs relating to bottling division 20,000 Portion of company’s general overheads allocated to bottling division 130,000 Required

(a) Using the absorption costing technique, would the new division be viable? Show your calculations.

(b) What recommendation might have been made if marginal costing had been used to evaluate the proposed new division? Show your calculations.

(c) Using marginal costing techniques, calculate:
(i) the break-even point (in bottles)
(ii) the number of bottles which would have to be sold to earn £16,000 profit for the bottling division (iii) how much profit or loss would be made if only 4,000 bottles were sold.