Management Accounting

1) Highland Coffee sells organic coffee in packs. Each pack was sold at the price of 35 last year and a total of 50,000 packs were produced and sold. The variable cost of producing a coffee pack last year was:

Direct material 10.00

Direct labour 12.00

Other direct costs 3.00

Variable overheads 1.00

The fixed overhead last year was 200,000.

For the forthcoming year, the following costs increases are expected:

%

Direct material 20.00

Direct labour 16.67

Other direct costs 66.67

Variable overheads 25.00

The fixed overhead for the forthcoming year is expected to increase by an acquisition of new packing machine due to changes in environmental regulations. This machine would cost 50,000 to purchase and would last 4 years with expected scrap value of 10,000. The company depreciation policy is to depreciate all machinery on a straight line basis. The machine supplier provides a guaranteed buy-back policy at the following specified prices:

After one year 35,000

After two years 25,000

After three years 17,000

After four years 10,000

Market has shown that if the company keep its increase its selling price below 20% it would have no impact on the volume sold. However for every 1% increase above 20% increase, the number of volume sold can be expected to decrease by 2%.

Required:

1) For the forthcoming year:

a) The selling price of the coffee packs if the number of packs sold and the annual profits are to remain as before.

b) The number of packs that the company would have to sell if it did not change the price charged but maintained the profit level attained in the previous year.

2) The management accounting CVP analysis has been criticised in that, among other matters, it does not deal with the following: a) Situations where sales volume differs radically from production volume.

b) Situations where the sales revenue and the total cost functions are markedly non-linear.

c) Changes in product mix.

d) Risk and uncertainty.

Give 2 reasons for each of the above objections