Thompson and White Ltd is a snack and beverage manufacturing company. On 1 January of next year, the company is planning to launch flavoured potato crisps – Delish. The management has decided that the standard size of a packet of Delish should be 32.5 grams. The accounting department has provided the following cost estimates for the product:

Thompson and White Ltd uses the absorption costing approach to cost-plus pricing. The company should invest £750,000 to produce and market 1,000,000 packets of Delish in a year. The company desires a return on investment (ROI) of 20%.

Required
1. Prepare a price quotation sheet for one packet of Delish.
2. Based on the values determined in Requirement 1, prepare a budgeted absorption costing profit statement.
3. Thompson and White Ltd was able to sell only 300,000 packets of Delish in the current year. Calculate the company’s return on investment (ROI).
4. Comment on the drawback of the absorption costing approach to cost-plus pricing based on the number of packets of Delish sold by Thompson and White Ltd at the end of the year.

Transcribed Image Text:

Direct material Direct labour Variable manufacturing overhead Fixed manufacturing overhead Variable selling, general and administrative expenses Fixed selling, general and administrative expenses Cost per packet £0.10 0.10 0.02 0.05 Total £80,000 100,000