a) A company manufactures a single product. Unit costs are: $/Unit Variable production cost 14.75 Fixed production 8.30 Variable selling 2.60 Fixed selling 5.45 400,000 units of the product were manufactured in a period, during which 394,000 units were sold. There was no inventory of the product at the beginning of the period. Required: 1) Use Marginal costing to calculate the total value of the finished goods inventory at the end of the period. 2) Many firms have decided to use marginal costing to prepare the income statement. Please briefly explain the benefits of using marginal costing. b) Newcastle Ltd manufactures and sells T-shirts imprinted with college names and slogans. Last Year, the shirts sold for £7.50 each, and the variable cost was £2.25 per shirt. The company needed to sell 20,000 shirts to break even. The net operating profit last year was £8,400. The company’s expectations for the coming year include the following: The selling price per T-shirt will increase by £1.50 Variable cost will increase by one third Fixed cost will increase by 10% If Newcastle Ltd wishes to earn £22,500 in net operating profit for the coming year, how much sales does this company have to make? c) The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. Following information is available: The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum. If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 of delivery cost is incurred for this purchase option. If it is rented, £ 4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £ 500 (the delivery cost for purchase option). For the rent option, firm is not going to sell old machines. Should the company buy or rent new machine? d) In Management Accounting, there are some investment appraisal methods to analyse the performance of investment projects. The following table lists out the financial data of two projects for London Technology Ltd: Projects/Methods A B Payback Period 2 year and 4 months 2 year and 9 months Accounting Rate of Return 27.6% 15.44% Net Present Value £23,040 £21,798 Required: Which project should company accept? In the discussion, please explain which method can leads to better decision. e) The manager of a tourist attraction is considering whether to open on 1 January, a day when the attraction has, in previous years, been closed. The attraction has a daily capacity of 1,000 visitors. If the attraction opens for business on that day it will incur additional specific fixed costs of $30,000. The contribution from the sale of tickets would be $25 per visitor. The number of visitors is uncertain but based on past experience it is expected to be as follows: Number of Visitors Probability 800 visitors 50% 900 visitors 30% 1,000 visitors 20% It is expected that visitors will also purchase souvenirs and refreshments. The contribution which would be made from these sales has been estimated as follows: Spending per Visitors Probability $8 per visitor 35% $10 per visitor 40% $12 per visitor 25% Required: Calculate whether it is worthwhile opening the tourist attraction on 1 January. You should use expected value as the basis of your analysis.

a) A company manufactures a single product. Unit costs are: $/Unit Variable production cost 14.75 Fixed production 8.30 Variable selling 2.60 Fixed selling 5.45 400,000 units of the product were manufactured in a period, during which 394,000 units were sold. There was no inventory of the product at the beginning of the period. Required: 1) Use Marginal costing to calculate the total value of the finished goods inventory at the end of the period. 2) Many firms have decided to use marginal costing to prepare the income statement. Please briefly explain the benefits of using marginal costing. b) Newcastle Ltd manufactures and sells T-shirts imprinted with college names and slogans. Last Year, the shirts sold for £7.50 each, and the variable cost was £2.25 per shirt. The company needed to sell 20,000 shirts to break even. The net operating profit last year was £8,400. The company’s expectations for the coming year include the following: The selling price per T-shirt will increase by £1.50 Variable cost will increase by one third Fixed cost will increase by 10% If Newcastle Ltd wishes to earn £22,500 in net operating profit for the coming year, how much sales does this company have to make? c) The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. Following information is available: The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum. If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 of delivery cost is incurred for this purchase option. If it is rented, £ 4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £ 500 (the delivery cost for purchase option). For the rent option, firm is not going to sell old machines. Should the company buy or rent new machine? d) In Management Accounting, there are some investment appraisal methods to analyse the performance of investment projects. The following table lists out the financial data of two projects for London Technology Ltd: Projects/Methods A B Payback Period 2 year and 4 months 2 year and 9 months Accounting Rate of Return 27.6% 15.44% Net Present Value £23,040 £21,798 Required: Which project should company accept? In the discussion, please explain which method can leads to better decision. e) The manager of a tourist attraction is considering whether to open on 1 January, a day when the attraction has, in previous years, been closed. The attraction has a daily capacity of 1,000 visitors. If the attraction opens for business on that day it will incur additional specific fixed costs of $30,000. The contribution from the sale of tickets would be $25 per visitor. The number of visitors is uncertain but based on past experience it is expected to be as follows: Number of Visitors Probability 800 visitors 50% 900 visitors 30% 1,000 visitors 20% It is expected that visitors will also purchase souvenirs and refreshments. The contribution which would be made from these sales has been estimated as follows: Spending per Visitors Probability $8 per visitor 35% $10 per visitor 40% $12 per visitor 25% Required: Calculate whether it is worthwhile opening the tourist attraction on 1 January. You should use expected value as the basis of your analysis.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

a) A company manufactures a single product.

Unit costs are: $/Unit

Variable production cost 14.75	Fixed production 8.30
Variable selling 2.60	Fixed selling 5.45

400,000 units of the product were manufactured in a period, during which 394,000 units were sold. There was no inventory of the product at the beginning of the period.

Required:

1) Use Marginal costing to calculate the total value of the finished goods inventory at the end of the period.

2) Many firms have decided to use marginal costing to prepare the income statement. Please briefly explain the benefits of using marginal costing.

b) Newcastle Ltd manufactures and sells T-shirts imprinted with college names and slogans. Last Year, the shirts sold for £7.50 each, and the variable cost was £2.25 per shirt. The company needed to sell 20,000 shirts to break even. The net operating profit last year was £8,400. The company’s expectations for the coming year include the following:
The selling price per T-shirt will increase by £1.50
Variable cost will increase by one third
Fixed cost will increase by 10%

If Newcastle Ltd wishes to earn £22,500 in net operating profit for the coming year, how much sales does this company have to make?

c) The production department of Y Company is planning to purchase a new machine to improve product quality. The company’s management accountant is currently evaluating two options- Buy the machine OR Rent it. Following information is available:
The company has to pay £3,200 to set up the machine. Insurance cost £450 per annum.
If it is bought, the new machine is depreciated on reducing balance basis at the rate of 25%. After various calculations, the company has to pay £4,200 maintenance cost every year and estimated repair cost would be £300 per year. The firm will have to sell old machines, which had cost £65,000 six years ago. Apart from the above information, the £500 of delivery cost is incurred for this purchase option.

If it is rented, £ 4,650 per year to pay as rent. There is no cost for repair and maintenance. However, the firm is required to pay the administration charge of £650 with this rent option. For rent option, the delivery cost remains at 20% of the £ 500 (the delivery cost for purchase option). For the rent option, firm is not going to sell old machines.

Should the company buy or rent new machine?

d) In Management Accounting, there are some investment appraisal methods to analyse the performance of investment projects. The following table lists out the financial data of two projects for London Technology Ltd:

Projects/Methods	A	B
Payback Period	2 year and 4 months	2 year and 9 months
Accounting Rate of Return	27.6%	15.44%
Net Present Value	£23,040	£21,798

Required:

Which project should company accept? In the discussion, please explain which method can leads to better decision.

e) The manager of a tourist attraction is considering whether to open on 1 January, a day when the attraction has, in previous years, been closed. The attraction has a daily capacity of 1,000 visitors. If the attraction opens for business on that day it will incur additional specific fixed costs of $30,000.

The contribution from the sale of tickets would be $25 per visitor. The number of visitors is uncertain but based on past experience it is expected to be as follows:

Number of Visitors	Probability
800 visitors	50%
900 visitors	30%
1,000 visitors	20%

It is expected that visitors will also purchase souvenirs and refreshments. The contribution which would be made from these sales has been estimated as follows:

Spending per Visitors	Probability
$8 per visitor	35%
$10 per visitor	40%
$12 per visitor	25%

Required:

Calculate whether it is worthwhile opening the tourist attraction on 1 January. You should use expected value as the basis of your analysis.

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