Question Tag: Incremental Analysis

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PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Question

Deban Construction Limited is deciding whether or not to proceed with a one-off special contract for which it would receive a one-off payment of N2,000,000. Details of relevant costs are provided for labor, materials, storage, and overheads. Calculate the relevant cost of the contract and advise whether the contract should be accepted or not on financial grounds.

Answer

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Tags: Incremental Analysis, Labour Costs, Material Costs, Overheads, Relevant Costs, Special Contract
Level: Level 2

Topic: Decision making techniques
Series: MAY 2018

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

Question

Obonku Limited produces Single, Double, and King-size beds for sale to hotels in West Africa. Its manufacturing plant is located in Tema and is currently operating at 100% capacity. Below is the annual output and sales for each product and the associated costs:

Product	Single bed	Double bed	King Size bed
Units sold	5,000 units	3,500 units	4,000 units
Sales (GHS)	2,500,000	2,800,000	3,800,000
Costs:
Material cost	750,000	1,400,000	1,520,000
Labour costs	600,000	1,050,000	1,200,000
Manufacturing O’head	200,000	650,000	300,000
Administrative cost	200,000	100,000	200,000
Total cost	1,750,000	3,200,000	3,220,000
Profit/Loss	750,000	(400,000)	580,000

The Director of Obonku is of the view that the Double bed product line is not doing well and should not be produced any longer. The following additional information has been provided:

40% of the labor cost for all bed types are fixed costs.
50% of the manufacturing overhead is variable for all products.
80% of the administrative cost is fixed.

Alom Hotel Limited, situated in Elmina, has requested 80 units of each bed and is ready to procure them at the current prices. Obonku Ltd can only produce more if they increase production capacity in the short term at an additional cost of GHS 80,000.

Assuming that costs and prices remain the same, you are required to:

a) Advise whether the company should shut down the production of Double beds. (10 marks)
b) Should the company accept the new order assuming Double beds will still be produced? (10 marks)

Answer

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Tags: Contribution analysis, Fixed Costs, Incremental Analysis, Product discontinuation, Variable Costs
Level: Level 2

Topic: Decision making techniques, Relevant Cost and Revenue
Series: NOV 2015

MA – Nov 2016 – L2 – Q3a – Decision making techniques

Advise on whether to further process joint products or sell at split-off based on cost and revenue analysis.

Question

Pinto Company Limited processes materials into finished products. After process one, two main products PEF and CEF are turned out. The production processes allow for 10% normal loss at process one and 5% for each product if it is to be processed further. The scrap at process one can be sold for GH¢6.60 per unit. The standard prices of the products are as follows: PEF to be sold at split-off point for GH¢17 per unit but can be sold for GH¢28 per unit after further processing. A unit of CEF can also be sold for GH¢16 at split-off point or GH¢25 after further processing. Further processing costs are: PEF; direct materials GH¢4 per unit and conversion GH¢3.50 per unit. The materials and conversion costs per unit for CEF are GH¢5 and GH¢4 respectively.

In the month of August 2016, 6,000 units were processed through process one at the following costs: direct materials GH¢40,000, conversion GH¢32,000. The output at the end of process one was 3,000 units for PEF and 2,000 units for CEF.

Required:

Advise management on which of the products should be processed further and which should be sold at split-off point if volume is used to share common cost. (12 marks)

Answer

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Tags: Further Processing, Incremental Analysis, Joint Products, Process Costing, Split-Off Point
Level: Level 2

Topic: Decision making techniques
Series: NOV 2016

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Incremental Analysis, Labour Costs, Material Costs, Overheads, Relevant Costs, Special Contract
Level: Level 2

Topic: Decision making techniques
Series: MAY 2018

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

Question

Product	Single bed	Double bed	King Size bed
Units sold	5,000 units	3,500 units	4,000 units
Sales (GHS)	2,500,000	2,800,000	3,800,000
Costs:
Material cost	750,000	1,400,000	1,520,000
Labour costs	600,000	1,050,000	1,200,000
Manufacturing O’head	200,000	650,000	300,000
Administrative cost	200,000	100,000	200,000
Total cost	1,750,000	3,200,000	3,220,000
Profit/Loss	750,000	(400,000)	580,000

The Director of Obonku is of the view that the Double bed product line is not doing well and should not be produced any longer. The following additional information has been provided:

40% of the labor cost for all bed types are fixed costs.
50% of the manufacturing overhead is variable for all products.
80% of the administrative cost is fixed.

Assuming that costs and prices remain the same, you are required to:

a) Advise whether the company should shut down the production of Double beds. (10 marks)
b) Should the company accept the new order assuming Double beds will still be produced? (10 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Contribution analysis, Fixed Costs, Incremental Analysis, Product discontinuation, Variable Costs
Level: Level 2

Topic: Decision making techniques, Relevant Cost and Revenue
Series: NOV 2015

MA – Nov 2016 – L2 – Q3a – Decision making techniques

Advise on whether to further process joint products or sell at split-off based on cost and revenue analysis.

Question

Required:

Advise management on which of the products should be processed further and which should be sold at split-off point if volume is used to share common cost. (12 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Further Processing, Incremental Analysis, Joint Products, Process Costing, Split-Off Point
Level: Level 2

Topic: Decision making techniques
Series: NOV 2016

Question Tag: Incremental Analysis

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PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

MA – Nov 2016 – L2 – Q3a – Decision making techniques

Advise on whether to further process joint products or sell at split-off based on cost and revenue analysis.

PM – May 2018 – L2 – Q3b – Cost-Volume-Profit (CVP) Analysis

Calculate the relevant cost for a special contract and determine if it should be accepted.

MA – Nov 2015 – L2 – Q3 – Decision making techniques | Relevant cost and revenue

Analyze whether to discontinue Double beds and whether to accept a new order for all bed sizes.

MA – Nov 2016 – L2 – Q3a – Decision making techniques

Advise on whether to further process joint products or sell at split-off based on cost and revenue analysis.

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