Question 1

Park Ltd produces a new product Z for which the following cost estimates have been made:

$

Direct Materials 30

Direct labor (5 hr at $6 per LH) 30

Variable production overheads (2MH at $5) 10

70

Production fixed overheads are budgeted at $300,000 per month and because of the shortage of available machining capacity, the company will be restricted to 10,000 machine hour per month. The absorption rate will be a direct labor rate, however, and budgeted direct labor hours are 25,000 per-month. It is estimated that the company could obtain a minimum contribution of $10 per MH on producing items other than product Z.

The direct cost estimates are not certain as to material usage rate and direct labor productivity, and it is recognized that the estimates of direct materials and direct labor costs may be subject to an error of + 10%. Machine time estimates are similarly subject to an error of + 15%. The company wished to make a profit of 30% on full production cost from product Z.

Required: Ascertain the full cost-plus based price.

Question 2

Bugs Ltd had budgeted to manufacture 20,000 units of its product. The variable cost per unit of the finished product is $16 and the semi- annual fixed costs, which are expected to be incurred evenly through-out the year is $40,000.

The financial accountant of Bug Ltd has suggested that a profit mark-up of 30% on full cost should be charged for every product sold.

The sales director has disagreed with the above suggestion by the accountant, and has produced the following estimates of sales demand for the product.

Price per unit Demand

$ Units

24 18,000

26 16,000

28 15,000

30 13,500

32 10,000

Required:

a) Calculate the profit for the year if a full cost-plus price is charged.

b) Calculate the profit for the year if a marginal costing approach is used.

c) Calculate the profit-maximizing price.

d) Calculate the profit using marginal cost-plus pricing if mark-up is 50%.