Calculation of minimum selling price You have received a request from EXE plc to provide a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared:

1. The steel is regularly used, and has a current stock value of £5.00 per sq. metre. There are currently 100 sq. metres in stock. The steel is readily available at a price of £5.50 per sq.
metre.
2. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of £20 for the fittings required.
3. The skilled labour is currently employed by your company and paid at a rate of £8.00 per hour. If this job were undertaken it would be necessary either to work 25 hours overtime which would be paid at time plus one half or to reduce production of another product which earns a contribution of £13.00 per hour.
4. The semi-skilled labour currently has sufficient paid idle time to be able to complete this work.
5. The overhead absorption rate includes power costs which are directly related to machine usage. If this job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of £0.75 per hour.
There are no other overhead costs which can be specifically identified with this job.
6. The cost of the estimating time is that attributed to the four hours taken by the engineers to analyse the drawings and determine the cost estimate given above.
7. It is company policy to add 20% on to the production cost as an allowance against administration costs associated with the jobs accepted.
8. This is the standard profit added by your company as part of its pricing policy.
Required:

(a) Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each of the values in your estimate.
(12 marks)

(b) There may be a possibility of repeat orders from EXE ple which would occupy part of normal production capacity. What factors need to be considered before quoting for this order?

(c) When an organization identifies that it has a single production resource which is in short supply, but is used by more than one product, the optimum production plan is determined by ranking the products according to their contribution per unit of the scarce resource. Using a numerical example of your own, reconcile this approach with the opportunity cost approach used in

(a) above. (6 marks)
(Total 25 marks)
CIMA Stage Operational Cost Accounting 10.10* Impact of a product abandonment decision and CVP analysis

(a) Budgeted information for A Ltd for the following period, analysed by product, is shown below:

General fixed costs, which are apportioned to products as a percentage of sales, are budgeted at £1 668 000.
Required:
(i) Calculate the budgeted profit of A Ltd, and of each of its products. (5 marks)
(ii) Recalculate the budgeted profit of A Ltd on the assumption that Product III is discontinued, with no effect on sales of the other two products. State and justify other assumptions made. (5 marks)
(iii) Additional advertising, to that included in the budget for Product I, is being considered.
Calculate the minimum extra sales units required of Product I to cover additional advertising expenditure of £80000. Assume that all other existing fixed costs would remain unchanged.

(iv) Calculate the increase in sales volume of Product II that is necessary in order to compensate for the effect on profit of a 10% reduction in the selling price of the product. State clearly any assumptions made. (5 marks)

(b) Discuss the factors which influence cost behaviour in response to changes in activity.

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Note () Direct labour Skilled Direct materials: Steel 10 m at 5.00 1 50 per sq. metre Brass fittings 25 hours at 8.00 3 200 2 20 20 per hour Semi-skilled 10 hours at 5.00 4 50 per hour Overhead 35 hours at 10.00 5 350 per hour Estimating time 6 100 770 Administrative overhead