Advanced: Preparation of project statements for different demand levels and calculations of expected profit Seeprint Limited is
Question:
Advanced: Preparation of project statements for different demand levels and calculations of expected profit Seeprint Limited is negotiating an initial one year contract with an important customer for the supply of a specialized printed colour catalogue at a fixed contract price of £16 per catalogue. Seeprint’s normal capacity for producing such catalogues is 50 000 per annum.
Last year Seeprint Limited earned £11 000 profit per month from a number of small accounts requiring specialized colour catalogues. If the contract under negotiation is not undertaken, then a similar profit might be obtained from these customers next year, but, if it is undertaken, there will be no profit from such customers.
The estimated costs of producing colour cata¬ logues of a specialized nature are given below.
The costs below are considered certain with the exception of the direct materials price.
Cost data:
You are required to:
(a) Tabulate the costs and profits per unit and in total and the annual profits, assuming that the contract orders in the year are: (i) 40 000, (ii) 50 000 and (iii) 60 000 catalogues, at a direct material cost of £4.50 per catalogue. Com¬ ment on the tabulation you have prepared.
(10 marks)
(b) Calculate the expected profit for the year if it is assumed that the probability of the total order is:
0.4 for 40000 catalogues 0.5 for 50000 catalogues 0.1 for 60 000 catalogues and that the probability of direct material cost is:
0.5 at £4.50 per catalogue 0.3 at £5.00 per catalogue 0.2 at £5.50 per catalogue. (6 marks)
(c) Discuss the implications for Seeprint Limited of the acceptance or otherwise of the contract with the important customer. (6 marks)
(Total 22 marks) ACCA Level 2 Management Accounting
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