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Budgeted Costs and Profits: Accpet or Reject Projects based on Profits

View Solution # 27176

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QUESTION1

The PIKEY COMPANY has designed a particular type of casual clothing. They have decided to set up in business to manufacture the product and have carried out market research that suggests that demand for the product could range between 5,000 units and 25,000 units per annum.
(a) Accordingly they have produced the following estimated costs for 15,000 units and have asked you to complete the following budget for the different levels of production:

I Production Level Units I 5,000 I 10,000 I 15,000 I 20,000 1•25,000 I
       £    £    £    £    £
Sales    @£30            450,000
Variable Costs    @£13            195,000
Contribution                255,000
Fixed Costs                150,000
Net Profit                105,000

QUESTION2

Near the end of the first year of trading, the management are considering the production of next year and have asked you to help with certain financial decisions. The selling price and all the costs have remained the same. The company is planning to manufacture 12,500 items next year.

(a) What is the budgeted marginal cost per item?
(b) What is the budgeted absorption cost per item?
(c) What is the budgeted profit or loss if 12,500 items are sold?

QUESTION3

An internet company, Salesonline.com, has approached the Pikey Co. with a view to selling their item online. They are prepared to guarantee a purchase of 2,500 units each year but, in view of the large quantity, offer a purchase price of only £20 per item. As the Pikey Co. usually sells through specialist shops, it is not expected that 'normal' sales will be affected. This 'special order' is additional production and is within the capacity of the factory, and fixed costs will remain unchanged.
You are to advise the management as to whether this offer should be accepted.

QUESTION4

A manufacturer in the Far East has offered to make the item of clothing under licence at a price of £20 up to 10,000 units and then £15 per unit above this level. Quality is guaranteed and, if the option is taken, the Pikey Co. would cease manufacturing and would act as distributors. As a result fixed costs would fall to £50,000 p.a.
You are to advise the management if this offer should be taken up. Are there any other points, financial and non-financial, that the management should consider before making its decision?

Solution

The solution has detailed answers to all the four questions. Step by step calculations and procedures are explained, with detailed theoritical explanation for the question 4.

No. of Words: 579 words Help

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Budgeted Costs and Profits: Accpet or Reject Projects based on Profits

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