management accounting
Highbury Components Ltd has received an order from Delta Production Ltd to produce 4000 units of Metalia, a newly designed component, to be delivered in eight weekly batches of 500 units for 8 weeks. Each batch involves direct labour working on machines for 50% of the time and 50% of the time without machines. The estimates for each batch are: Material Aluminium high grade 200 metres @ 3 per metre 500 packs of small components @ 0.10 per pack Direct labour 40 hours @ 22 per hour Machine variable overhead @ 2 per direct machine hour Labour variable overhead @ 4 per direct labour hour The agreed price per batch is 3,000, which is lower than Highbury Components Ltd.'s usual pricing policy, as their normal mark-up is 100% on variable costs. However competitive pressures mean that a higher price would lose them the work. They also expect that repeat orders will be made. The purchasing and production departments have been asked to look at the possibility of reducing costs. Required: a) Calculate the variable costs for one batch and the normal price that would be charged. (2 marks) b) Assuming that: (i) The Aluminium price could be reduced by 6% for all orders after the first 400 metres have been bought. No discount is possible for the small components. An 80% learning curve will be experienced up to batch eight, after which no additional efficiency will be experienced. Calculate the total cost of the first 8 batches and comment on the profitability of the total order. (10 marks) c) Using the learning curve formula the following information has been obtained: The average hours per batch of cumulative production for 7 batches is 21.377 hours. There will be no added efficiency for batches after batch 8. If the price is maintained at 3,000 per batch, calculate the contribution which will be made on each additional batch. (4 marks) d) Explain the importance for decision making and control of knowing the learning curve effect (4 marks) Highbury Components Ltd has received an order from Delta Production Ltd to produce 4000 units of Metalia, a newly designed component, to be delivered in eight weekly batches of 500 units for 8 weeks. Each batch involves direct labour working on machines for 50% of the time and 50% of the time without machines. The estimates for each batch are: Material Aluminium high grade 200 metres @ 3 per metre 500 packs of small components @ 0.10 per pack Direct labour 40 hours @ 22 per hour Machine variable overhead @ 2 per direct machine hour Labour variable overhead @ 4 per direct labour hour The agreed price per batch is 3,000, which is lower than Highbury Components Ltd.'s usual pricing policy, as their normal mark-up is 100% on variable costs. However competitive pressures mean that a higher price would lose them the work. They also expect that repeat orders will be made. The purchasing and production departments have been asked to look at the possibility of reducing costs. Required: a) Calculate the variable costs for one batch and the normal price that would be charged. (2 marks) b) Assuming that: (i) The Aluminium price could be reduced by 6% for all orders after the first 400 metres have been bought. No discount is possible for the small components. An 80% learning curve will be experienced up to batch eight, after which no additional efficiency will be experienced. Calculate the total cost of the first 8 batches and comment on the profitability of the total order. (10 marks) c) Using the learning curve formula the following information has been obtained: The average hours per batch of cumulative production for 7 batches is 21.377 hours. There will be no added efficiency for batches after batch 8. If the price is maintained at 3,000 per batch, calculate the contribution which will be made on each additional batch. (4 marks) d) Explain the importance for decision making and control of knowing the learning curve effect (4 marks)
