Answer the following questions.,,,
Consider a market with two horizontally differentiated firms, X and Y. Each has a constant marginal cost of $20.
Demand functions are:
?? = 100 - 2?? + 1??
?? = 100 - 2?? + 1??
Calculate the Bertrand equilibrium in prices in the market. Also, calculate the quantity sold and the profit of each firm.
Consider a market with two horizontally differentiated firms, X and Y. Each has a constant marginal cost of $20. Demand functions are:
Qx = 100 - 2Px + 1Py
Qy = 100 - 2Py + 1Px
What are the equilibrium Bertrand prices in the market?
QUESTION FOUR Pot Ltd produces a single product. The management currently uses an absorption costing approach but is considering using a variable costing approach in the future. The following data relates to the most recent month of operations. (125 Selling price per unit Units in beginning inventory 250 Units produced 7,400 Units sold 5,900 Direct material per unit 654 Direct labour per unit Variable manufacturing overhead per unit E2 Variable selling and administrative cost per unit 64 Fixed manufacturing overhead cost (74,000 Fixed selling and administrative cost (35,400 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. REQUIRED: (a) Calculate the unit product cost for the month under variable costing and under absorption costing. (6 Marks) (b) Prepare an income statement for the month using variable costing principles. (15 Marks) (c) Prepare an income statement for the month using absorption costing principles. (15 Marks) (d) Contrast the general effect on profit of using absorption and marginal costing principles respectively. Use the figures in (b) and (c) above to illustrate your answer. (8 Marks) (e) Describe the circumstances when variable and absorption costing systems will report identical profits. (6 Marks) (TOTAL: 50 MARKS) Page 5 of 6QUESTION THREE Knowing that you are studying management accounting, a friend who manages a small business has sought some costing advice about Project X - a one-off order that he intends to tender for. The costs associated with the Project X are as follows: E16,000 Material A E32,000 Material B E24,000 Direct labour 68,000 Supervision E48,000 Overheads (128,000 You ascertain the following information: i. Material A is in stock and the above was the cost. There is now no other use for Material A, other than Project X and it would cost $7,000 to dispose of. ii. Material B would have to be ordered at the cost shown above. iti. Direct labour costs of $24,000 relates to workers that will be transferred to this project from another project. Extra labour will need to be recruited to the other project at a cost of $28,000. iv. Supervision costs have been charged to the project on the basis of 33% of labour costs and will be carried out by existing staff within their normal duties. V. Overheads have been charged to the project at the rate of 200% on direct labour. vi. The company is currently operating at a point above break-even. vii. The project will need the utilisation of machinery that will have no other use to the company after the project has finished. The machinery will have to be purchased at a cost of (40,000 and then disposed of for E21,000 at the end of the project. The friend tells you that the customer is prepared to pay up to a maximum of $90,000 for the project and a competitor is prepared to accept the order at that price. He also informs you the minimum that he can charge is (140,000 as the above costs show E128,000 and this does not take into consideration the cost of the machine and profit to be taken on the project. REQUIRED: (a) Based on the information provided, advice your friend as to whether or not he should tender for Project X. Explain your treatment of each item that comprises your financial analysis. State any assumptions that you made. (25 Marks) (b) Outline three non-financial factors that your friend should also consider before making their final decision as to whether or not tender for this project. (15 Marks) (c) Outline what is meant by a 'sunk cost' and explain why firms need to consider this type of cost when making decisions. Provide two examples of 'sunk costs' to supplement your answer. (10 Marks) (TOTAL: 50 MARKS) Page 4 of 6
